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Taxes, Benefits and Same-Sex Marriage: Oregon Weighs in and the IRS Simplifies Employers' Tax Refunds

October 21, 2013

By Thomas I. Kramer


Readers of our June 28 and August 30, 2013 Bullard Alerts already know these basic facts.
  • In U.S. v. Windsor, the Supreme Court held that a portion of the Defense of Marriage Act violates the U.S. Constitution, so the federal government may not simply conclude that same-sex partners are never considered to be married to each other for purposes of federal law.
  • Whether a couple is married, for federal tax and benefits purposes, is to be determined by the law of the state in which the couple was married and not the state where the couple lives.
  • Couples joined in a state-sanctioned civil union or domestic partnership, as opposed to a marriage, are not considered married for federal tax and benefits purposes.
  • Employers and employees may be entitled to refunds of overpaid federal taxes attributable to taxable income imputed to employees whose same-sex spouses were covered under a benefit plan of the employee’s employer.

Opinion Written by Oregon Attorney General

On October 16, 2013, the Oregon Attorney General issued an opinion to the State’s Chief Operating Officer regarding whether Oregon should recognize same-sex marriages validly entered into in a jurisdiction that permits such marriages. While the Oregon Constitution does not recognize same-sex marriages, the opinion concludes that refusal to recognize such marriages would likely violate the Equal Protection Clause of the U.S. Constitution. Although the opinion is an “attorney-client privileged communication,” it has been widely reported in the news media.

The opinion concluded that “it is legally defensible for Oregon agencies to recognize same-sex marriages validly performed in other jurisdictions.” The State’s Chief Operating Officer sent a memo to State agency directors stating: “Oregon agencies must recognize all out-of-state marriages for the purposes of administering state programs,” including “legal, same-sex marriages performed in other states and countries.”

The Attorney General’s opinion, if upheld as the law in Oregon, will close a small gap for employers and employees. Previously, it appeared that a same-sex couple residing in Oregon and validly married elsewhere would not be considered married for Oregon-law purposes unless they registered in Oregon as domestic partners. Failure to register could complicate tax issues for the couple and the employer of either of them. The opinion would treat the couple as married in Oregon whether or not they enter into an Oregon-registered domestic partnership.

Employer Refunds of Employment Taxes

On September 23, 2013, the IRS issued Notice 2013-61, containing a simplified procedure employers may use to claim a credit or refund of excess federal taxes paid during “open” tax years. These taxes relate to imputed income from benefits provided to certain employees’ same-sex spouses. The general principles set out in the Notice are the following.
  • Employers may, by December 31, 2013, repay to current and former employees any employment taxes withheld from wages due to imputed income from same-sex spouse benefits and reduce their deposits with Form 941 for the fourth quarter of 2013 to take credit for overpayments in 2013. Employers should also reduce their deposit of withheld federal income taxes for the fourth quarter of 2013 by the amount of such taxes repaid to the affected employees by 12/31/13. Such an employer will not have to file separate Forms 941-X to correct its reports for each of the first three quarters of 2013.
  • An employer that does not follow the approach above may repay the overwithholding to current and former employees after 2013, file Form 941-X for the fourth quarter of 2013 and claim a credit for 2013. Alternately, an employer may claim a refund rather than a credit, but then must get the affected employees’ consents to the employer’s application for refund. Overwithheld income tax may not be corrected by the employer after the end of the year for which it was withheld, but employees may obtain refunds by filing Form 1040X individually.
  • For open years before 2013, the employer may file one Form 941-X for the fourth quarter of the year, covering all of that prior year. The employer must repay the overwithheld employment taxes to the affected employees, obtain written statements from the affected employees that they have not successfully filed their own refund claims and file Form W-2c for each of the affected employees showing their correct income and wages for the year. Here again, the employer may not correct overwithheld income taxes for the prior year, but employees may obtain refunds for open years by filing Form 1040X individually.

What to Do

This was the to-do list for employers in our August 30, 2013 Alert, which we still advise:
  • Update payroll systems and plan administration procedures to recognize same-sex spouses; stop automatically imputing income to employees with same-sex spouses.
  • Review with administrators of health plans, cafeteria plans, HRAs, health FSAs and HSAs the new rules summarized above for same-sex spouses.
  • Review participant notices, including COBRA and HIPAA special-enrollment notices, for clarity about new rules above for same-sex spouses.
  • Review retirement plan death beneficiary designations by participants with same-sex spouses; request spouse consent if participant designated a non-spouse beneficiary.
  • Consider applying for refunds of overpaid federal taxes on same-sex spouse benefits.
  • Review employee benefit plan documents, summary plan descriptions and other plan-related documents to determine whether revisions are needed.

Bullard Law will continue to monitor developments in the law. Please feel free to contact us at any time with any questions about any labor, employment or benefits issues.