The IRS issued a notice today setting forth special procedures by which employers may claim a refund of FICA taxes that were paid on employee benefits solely because of the application of the Defense of Marriage Act (“DOMA”).  Section 3 of DOMA prohibited the IRS from recognizing same-sex marriages for federal tax purposes and was struck down by the Supreme Court last June in a case called United States v. Windsor.  Prior to the Windsor decision, employers paid the employer’s share of FICA tax, withheld the employee’s share of FICA tax, and withheld income tax with respect to benefits for same-sex spouses of employees when the benefits could be provided tax-free to employees’ opposite-sex spouses.  In large part, the benefits at issue are health benefits, although certain tuition and other benefits also might have been taxed solely on account of DOMA.  Following the Windsor decision, refunds now may be obtained.

The special refund procedures set forth by the IRS are described below.  For purposes of this discussion, “same-sex spouse benefits” refer to benefits provided to employees’ same-sex spouses that are no longer subject to tax on account of the Windsor decision.  The new procedures are divided into time periods, as follows:

1.  Third Quarter Withholding for 2013.  If the employer withheld employment taxes for same-sex spouse benefits during the period from July 2013 through September 2013 and repays or reimburses the employee for the amount of the taxes before filing the Form 941 for the third quarter of 2013, the employer does not need to report on that form the value of the benefits as wages or the associated tax withholding.

2.  Refunds for 2013.  The IRS offer two, alternative procedures to correct FICA tax payments and income tax withholding on same-sex spouse benefits in 2013:

  • Refund to Employees by Year-End of FICA Tax and Income Tax Withholding.  If the employer repays or reimburses its employees by December 31, 2013, for the amount of FICA and income tax withholding that was over-collected during the first three quarters of 2013, the employer may reduce the amount of wages, tips and other compensation reported on the Form 941 for the fourth quarter of 2013 by the value of same-sex spouse benefits that were treated as taxable during the first three quarters of 2013.  The amount of income taxes withheld that is reported on that form would also be reduced by the amount of income taxes repaid or reimbursed to the employee.  Note that this approach does not appear to be available with respect to any tax withheld and paid in the fourth quarter of 2013.
  • Refund to Employees after Year-End of FICA Tax.  Alternatively, if the employer does not repay or reimburse its employees by December 31, 2013, for the over-collected FICA and income taxes, the employer may file one Form 941-X for the fourth quarter of 2013 to make corrections for FICA tax over-payments for all of 2013.  To obtain a FICA tax refund, the employer must first either (a) repay or reimburse its employees or (b) obtain the employees’ consent to pursue the claim for a refund.  The IRS has stated that if the employee declines to participate in writing or cannot be located after the employer uses reasonable efforts, the employer may still seek a refund of the employer’s portion of FICA.  However, in no event may the employer seek a refund after 2013 of income tax withheld in 2013.  Instead, the employee receives credit for the over-withheld income tax when filing the employee’s 2013 Form 1040.

3.  Refunds for Open Years Before 2013.  For open years before 2013, the employer may seek a FICA refund with respect to same-sex spouse benefits by filing a single Form 941-X for the year for which the refund is claimed.  Open years generally include 2010, 2011, and 2012, unless the employer filed a protective claim or for other reasons an earlier year remains open.  The same rules apply as described in the second alternative, above, including the requirement to repay or reimburse the employee or obtain the employee’s consent to obtain the refund.  In addition, the employer must file a Form W-2c for each affected employee for the prior years.  An employer may not seek a refund of income tax withheld and paid to the IRS for same-sex spouse benefits in a prior year.  Instead, the employee receives credit by filing an amended tax return on Form 1040X for the prior year.  Note, however, that if the employee chooses to file an amended return for a prior year based on Windsor, the employee must file as married for all purposes on the amended form, which could mean additional taxes are due.

The IRS notes that refunds of social security tax for a year may be limited with respect to an employee whose wages exceeded the social security wage base during the year.  For example, there is no refund of social security tax for an employee whose wages from the employer exceeded the wage base after excluding the value of the same-sex spouse benefits.  This is the case even if the employer withheld FICA tax (and paid the employer portion of FICA tax) on same-sex spouse benefits provided at the beginning of the year.