On June 27, 2014, the IRS released Information Letter 2014-0012, which contains guidance for employees who have had the value of same-sex spousal coverage under employer health plans — which until recently was required to be included in gross income — reported on their Forms W-2.
BACKGROUND
Historically, the employer cost of opposite-sex spousal coverage under employer-provided health plans was tax free, see Treas. Reg. section 1.106-1, while the employer cost of same-sex spousal coverage resulted in taxable income to the employee. Further, the employee cost of opposite-sex spousal coverage could be paid for on a pre-tax basis through a cafeteria plan, see I.R.C. section 125, while same-sex spousal coverage could only be paid for with after-tax dollars.
In United States v. Windsor, 570 U.S. ___, 133 S. Ct. 2675 (2013), the U.S. Supreme Court declared Section 3 of the Defense of Marriage Act (“DOMA”) — which had prohibited the recognition of same-sex couples as spouses for federal tax law purposes — unconstitutional. Thereafter, the IRS issued guidance providing that same-sex spouses who were lawfully married under the law of any state — regardless of where those same-sex spouses resided — would be treated the same as opposite-sex spouses for federal tax purposes. See Revenue Ruling 2013-17. Subsequent IRS guidance clarified the tax treatment of the employer cost and the employee cost of same-sex spousal coverage: the former would not result in taxable income to the employee and the later could be paid on a pre-tax basis through a cafeteria plan. See Notice 2014-1.
INFORMATION LETTER 2014-0012
Information Letter 2014-0012 outlines two possible correction methods for an employee who has had the value of same-sex spousal health coverage reflected on a Form W-2.
Option One: The employee can ask the employer for a corrected Form W-2 — that does not include the value of any excludable spousal health coverage in taxable wages — and use the corrected Form W-2 when filing the employee’s tax return.
Option Two: If the employer does not issue a corrected Form W-2, the employee can complete Form 4852 (Substitute for Form W-2, Wage and Tax Statement, or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.) pursuant to the instructions contained the Information Letter and file it with a completed Form 1040 and the uncorrected Form W-2.
The Information Letter also advises employees that they may be entitled to a refund of federal employment taxes (social security and Medicare) paid on the value of excludable spousal health coverage and provides two possible refund methods: an employer-sought refund and an employee-sought refund via Form 843 (Claim for Refund and Request for Abatement).
Key Take Away: Significantly, Information Letter 2014-0012 does not require employers to issue corrected Form W-2s or seek a refund of federal employment taxes. Accordingly, considerations of payroll department workload and employee relations can determine whether issuance of a corrected Form W-2 or the seeking of a refund is appropriate. Payroll departments who have not already done so should ensure their Form W-2 reporting and federal employment tax withholding aligns with Windsor and subsequent IRS guidance.