Post-Windsor IRS Guidance Includes Streamlined Employment Tax Correction Procedures | Practical Law

Post-Windsor IRS Guidance Includes Streamlined Employment Tax Correction Procedures | Practical Law

The Internal Revenue Service (IRS) has issued Notice 2013-61, which provides streamlined administrative procedures for employment tax adjustments and refund claims for overpayments of employment taxes attributable to same-sex spouse benefits.

Post-Windsor IRS Guidance Includes Streamlined Employment Tax Correction Procedures

Practical Law Legal Update 7-542-7305 (Approx. 7 pages)

Post-Windsor IRS Guidance Includes Streamlined Employment Tax Correction Procedures

by Practical Law Employee Benefits & Executive Compensation
Published on 24 Sep 2013 • USA (National/Federal)
The Internal Revenue Service (IRS) has issued Notice 2013-61, which provides streamlined administrative procedures for employment tax adjustments and refund claims for overpayments of employment taxes attributable to same-sex spouse benefits.
On September 23, 2013, the IRS issued Notice 2013-61, which provides streamlined administrative procedures for employment tax adjustments for 2013 and prior years regarding same-sex spouse benefits. The guidance follows the Supreme Court's decision in US v. Windsor (holding that Section 3 of DOMA is unconstitutional) and builds on IRS Revenue Ruling 2013-17 (adopting a general rule for federal income tax purposes recognizing a same-sex marriage that is valid in the state of celebration, regardless of the married couple's place of domicile) (see, respectively, Legal Updates, Supreme Court: DOMA Section 3 is Unconstitutional and Proposition 8 Proponents Lack Standing and IRS Adopts Same-sex Marriage Recognition Rule).

Windsor and Its Consequences

Before Windsor, employers may have withheld and paid employment taxes regarding certain benefits provided to an employee's same-sex spouse because:
  • Same-sex marriage was not recognized for purposes of the Internal Revenue Code (IRC).
  • Benefits were not treated as excludable from gross income or wages for federal income or employment tax purposes.
In general, employers must file a Form 941-X (Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund) for each calendar quarter for which a refund claim or adjustment is made. However, as to overpayments related to same-sex spouse benefits and amounts paid to same-sex spouses for 2013, Notice 2013-61 provides two alternative, streamlined administrative procedures:
  • An option permitting employers to correct overpayments of employment taxes for the first three quarters of 2013, using the fourth quarter 2013 Form 941 (Employer's Quarterly Federal Tax Return).
  • An option permitting employers to correct overpayments of Federal Insurance Contributions Act (FICA) taxes for all quarters of 2013, using Form 941-X for the fourth quarter of 2013.
Also, regarding overpayments of FICA taxes for years before 2013, the guidance permits employers to make a claim or adjustment for all four calendar quarters of a year using one Form 941-X filed for the fourth quarter of the year, subject to the applicable limitations period.
The notice's streamlined administrative procedures are optional. Employers can use regular correction procedures instead of the notice's administrative procedures.

Same-sex Benefits Governed by Notice 2013-61

For purposes of Notice 2013-61, "same-sex spouse benefits" refer to those benefits specified in Revenue Ruling 2013-17 for which amended income tax returns and adjusted employment tax returns or claims for refund or credit can be filed (see Legal Update, IRS Adopts Same-sex Marriage Recognition Rule). These benefits include employer-provided health coverage and fringe benefits that:
  • Were provided by an employer to a same-sex spouse.
  • Are excludable from income under IRC Sections 106 (health plan coverage), 117(d) (qualified tuition reduction), 119 (meals or lodging furnished for the employer's convenience), 129 (dependent care assistance programs) or 132 (fringe benefits) based on an individual's marital status.
An example involves an employee who:
  • Made a pre-tax salary-reduction election for health coverage under a cafeteria plan (see Practice Note, Cafeteria Plans).
  • Elected health coverage for a same-sex spouse on an after-tax basis under an employer-sponsored group health plan.
Post-Windsor, the employee in this example could treat amounts paid for same-sex spouse coverage on an after-tax basis as pre-tax salary reductions. Under Notice 2013-61, employment taxes paid on the after-tax amounts can be treated as overpayments of employment taxes.

Employment Tax Returns for Third Quarter 2013

Notice 2013-61 provides that employers need not report wages and withholding on the third quarter (July, August and September) 2013 Form 941 if they:
  • Withhold employment taxes for same-sex spouse benefits paid to or on behalf of an employee in the third quarter of 2013.
  • Determine the amount withheld on such benefits.
  • Repay or reimburse the employee for the amount of the taxes before filing their third quarter 2013 Form 941.
However, employers that fail to repay or reimburse employees for overcollected amounts before filing their third quarter 2013 Form 941:

Procedures for 2013 Adjustments on Fourth Quarter Form 941 or Form 941-X

For employers that treated the value of same-sex spouse benefits as taxable wages on Form 941 for the first three quarters of 2013, Notice 2013-61 provides two alternative streamlined administrative procedures to correct overpayments of employment taxes attributable to those benefits.

First Alternative Procedure

The notice's first alternative procedure is available for employers that repay or reimburse employees for overcollected FICA and income tax amounts regarding same-sex spouse benefits for the first three quarters of 2013 on or before December 31, 2013. After doing so, the employer can report reductions on its fourth quarter 2013 Form 941, reflecting the amount of same-sex spouse benefits treated as wages for the first quarters of 2013, including adjustments to:
  • Wages, tips and other compensation (line 2).
  • Taxable social security wages (line 5a), but factoring the social security wage base.
  • Taxable Medicare wages and tips (line 5c).
Adjustments to fourth quarter income tax withholding, and other amounts should also be reported.
Employers that use this first alternative procedure need not file separate Forms 941-X to correct each of the first three quarters of 2013. However, employers may only correct the employer share of FICA tax corresponding to the employee share of FICA tax that has been repaid or reimbursed to employees on or before December 31, 2013.

Second Alternative Procedure

The notice's second alterative procedure is available for an employer that:
  • Does not repay or reimburse employees for the amount of withheld FICA and income taxes regarding same-sex spouse benefits provided in 2013 on or before December 31, 2013.
  • As a result, makes no adjustments to its fourth quarter 2013 Form 941.
Under this second procedure, an employer can correct overpayments of FICA taxes regarding same-sex spouse benefits paid in 2013 by filing one Form 941-X (for the fourth quarter of 2013). This Form 941-X reflects adjustments or claim refunds or credits of overpaid FICA taxes for same-sex spouse benefits paid in all quarters of 2013. Employers that use this second procedure must satisfy the usual requirements for filing Form 941-X, which include:
  • Repaying or reimbursing employees for overcollected employee FICA tax (or, for refund claims, securing employee consents).
  • Obtaining required written statements from employees.
However, employers cannot make adjustments for overpaid income tax withholding for a prior calendar year unless the overpayment is due to an administrative error. Also, employers may not claim a refund or credit for overpayments of income tax withholding if the tax was deducted and withheld from the employee. The second procedure cannot be used for income tax withheld from employees for same-sex spouse benefits provided in 2013. This is because the procedure is only available if an employer did not repay or reimburse employees for the amount of withheld taxes on same-sex spouse benefits provided in 2013 on or before December 31, 2013.

Administrative Procedures for Adjustments or Claims for Refund for Years Before 2013

Notice 2013-61 also provides a procedure for employers to make adjustments or claims for refund or credit of overpayments of FICA taxes paid on same-sex spouse benefits for any year before 2013, provided the limitations period has not expired. Under this procedure, employers:
  • Must factor the applicable social security wage base in determining the overpayment of FICA taxes for the prior year being corrected.
  • May file one Form 941-X for the fourth quarter of the prior year, which reflects adjustments or refunds for all overpayments of employment taxes regarding same-sex spouse benefits provided during the prior year, including overpayments reflected in the Forms 941 for the first three quarters of the year.
  • May not make adjustments for overpayments of income tax withholding for pre-2013 calendar years, unless they were due to administrative error.
Also, an employer may not claim a refund or credit for an overpayment of income tax withholding if the tax was deducted and withheld from the employee. Therefore, this procedure cannot be used for income tax withheld from employees regarding same-sex spouse benefits in prior years.

Practical Impact

The procedures set out in this notice, which were promised by the IRS in earlier post-Windsor guidance, should reduce the number of separate corrective filings needed in response to Windsor. However, as noted, employers are free to use the regular correction procedures.
The notice is directed at corrections and adjustments involving employer-provided health coverage and fringe benefits, and does not include anticipated, post-Windsor retirement plan guidance addressing plan amendment requirements and corrections for plan operations.