In September, the Internal Revenue Service (“IRS”) and U.S. Department of Treasury issued Notice 2013-61, which provides special streamlined administrative procedures that employers may use to claim a refund or credit for the overpayment of income and employment taxes on account of same-sex spousal benefits for 2013 and prior calendar years open under the statute of limitations. Notice 2013-61 was issued in response to the U.S. Supreme Court’s decision in United States v. Windsor, which invalidated section 3 of the Defense of Marriage Act (“DOMA”). These streamlined procedures are optional. An employer can continue to use the standard IRS administrative procedures to obtain a refund or credit for tax overpayments.
Numerous benefits that an employer provides to an employee’s spouse are not subject to federal income and Federal Insurance Contributions Act (“FICA”) taxes. Prior to Windsor, the IRS interpreted section 3 of DOMA as prohibiting it from extending these exclusions to benefits provided to an employee’s same-sex spouse. As a result, employers were required to impute the value of employer-paid healthcare or other fringe benefits provided by the employer to same-sex couples that would normally be excludable based on the employee’s marital status.
Following Windsor, the IRS issued Revenue Ruling 2013-17, providing that it would treat same-sex spouses the same as opposite-sex spouses for federal tax purposes regardless of place of domicile, provided the marriage occurred in a jurisdiction that recognized same-sex marriage. Accordingly, same-sex spouses who are legally married in a jurisdiction that recognizes same-sex marriages are eligible for the same tax-free employer-paid health benefits available to opposite-sex spouses and are thus entitled to a refund of any overpayment of income and FICA taxes related to these benefits.
Revenue Ruling 2013-17 applies prospectively as of September 16, 2013. However, the IRS said it would allow taxpayers to rely on the ruling retroactively for the purposes of filing original returns, amended returns, adjusted returns, or claims for credit or refund of an overpayment of employment tax with respect to employer-provided health coverage benefits or fringe benefits that are excludable under the following sections of the Internal Revenue Code:
• Section 106 (Employer contributions to accident and health plans),
• Section 117(d) (Qualified tuition reductions),
• Section 119 (Meals and lodging provided for the convenience of the employer),
• Section 129 (Dependent care assistance programs), or
• Section 132 (Miscellaneous fringe benefit exclusions).
In addition, the ruling allows taxpayers to treat post-tax amounts paid for a same-sex spouse’s coverage under a group health plan as pre-tax amounts.
Procedures for Correcting Overpayments
Employers who have withheld federal income and FICA taxes from benefits provided to an employee’s same-sex spouse prior to Windsor may now claim a refund or credit for these overpayments. Notice 2013-61 describes five procedures for doing so:
• Standard procedure,
• Special procedure for correcting overpayments made in the third quarter of 2013,
• Two special procedures for correcting overpayments made throughout 2013, and
• Special procedure for correcting overpayments made before 2013, subject to the period of limitations.
The IRS designed these streamlined procedures to reduce the employer’s filing burden (as well as the burden on IRS personnel).
Employers may still use the same methods to correct overpayments of income and FICA taxes resulting from Windsor and Revenue Ruling 2013-17 that they used to correct employment tax overpayments prior to Notice 2013-61. Namely, after ascertaining that it has made an overpayment, an employer may use the “X” form that corresponds to the return being corrected. For example, the employer would use the IRS Form 941-X to correct an overpayment that it reported on a previously filed Form 941. This standard procedure requires an employer to file a separate Form 941-X for each quarter in which it made an overpayment.
Special Procedure: Third Quarter of 2013
The first special procedure described in Notice 2013-61 concerns income and FICA tax overpayments made during the third quarter of 2013 (i.e., July, August and September 2013). The Notice provides that the IRS would allow an employer that withheld income and FICA taxes from benefits provided to an employee’s same-sex spouse to satisfy its reporting obligations merely by not reporting the employee’s wages and withholding on its third quarter Form 941, provided the employer repays or reimburses the employee for the amount of this overwithheld tax before it files the form. This procedure relieves the employer of the need to file a Form 941-X for this period.
If the employer does not repay or reimburse the employee for the overcollected amount before it files its third quarter Form 941, the employer must report that amount on its return. It may, however, correct this overpayment using either the standard procedure described above, or an applicable special procedure described below.
Special Procedure: 2013 Overpayments
The IRS provides employers with two streamlined procedures for correcting income and FICA tax overpayments made in 2013. The method the employer uses depends on when it repays or reimburses its employees for the income and FICA tax overpayments.
If the employer repays or reimburses an employee before December 31, 2013, the employer may simply reduce the amount of wages and withholding it reports on its fourth quarter Form 941 by a corresponding amount. This is analogous to the special procedure for third quarter overpayments described above. This procedure allows the employer to meet its reporting obligations without filing any Forms 941-X.
If the employer does not repay or reimburse an employee for an overpayment before December 31, 2013, it must file a Form 941-X. However, an employer may satisfy its reporting obligations by filing a single Form 941-X for the fourth quarter of 2013 that reflects all FICA tax overpayments made during the year, rather than filing separate Forms 941-X for each quarter. It is noted that employers may not use this second procedure to recover overwithheld federal income taxes, unless the overpayment is attributable to an administrative error. Employees in same-sex marriages will receive a credit for the overwithheld income tax for 2013 when they file their individual income tax returns (Forms 1040) in 2014.
Special Procedure: Overpayments made before 2013
For prior tax years open under the statute of limitations (generally three years), the streamlined procedure permits employers to correct FICA tax overpayments by filing a single Form 941-X for the fourth quarter of the year during which the employer made the overpayments. This is analogous to the second procedure described above for 2013 overpayments. It is noted that employers may not use this procedure to recover overwithheld federal income taxes, unless the overpayment is attributable to an administrative error. Employees can only recoup these overpayments by filing amended individual income tax returns for the prior year or years (Forms 1040X).
Although an employer may file one Form 941-X to correct for all four quarters of a prior year, this special procedure does not relieve an employer from its obligation to file Forms W-2c, obtain the required written consents from the employees at issue, and reimburse employees for the overcollected FICA taxes.
While the streamlined procedures available under Notice 2013-61 are optional, employers should consider using the procedures to reduce their filing obligations, especially for 2013. Employers also should consider whether to file FICA refund claims for prior years or to simply take a credit. Last, although the Notice does not require employers to notify affected employees of overwithheld federal income and FICA taxes, such employers should consider distributing an appropriate communication to these employees.
If you have any questions regarding Notice 2013-61, please contact the Trucker Huss attorney with whom you normally work.