Tag Archives: department of the treasury

same.sex

The impact of the Supreme Court's Windsor ruling

Section 3 of the Defense of Marriage Act (“DOMA”) defined marriage under federal law as a legal union between one man and one woman. In June, the Supreme Court declared that provision unconstitutional in U.S. v. Windsor (No. 12-307, June 26, 2013). On Aug. 29, 2013, the Department of the Treasury and the IRS jointly issued initial guidance on how Windsor affects federal tax law. Here are answers to some questions that will help clarify the impact.

AFTER WINDSOR, WHAT CONSTITUTES A MARRIAGE FOR TAX PURPOSES?
Rev. Rul. 2013-17 states that a marriage is recognized for federal tax purposes if the marriage was validly entered into in any one of the 50 states, the District of Columbia, a U.S. territory or foreign country whose laws authorize the marriage of same sex individuals. Even if a married couple resides in a state where the marriage is not recognized under state law, federal tax law will treat the same-sex couple as legally married. Rev. Rul. 2013-17 does not extend such recognition to other relationships recognized under state law that are not “marriages,” such as registered domestic partnerships or civil unions.

WHEN IS REV. RUL. 2013-17 EFFECTIVE?
The ruling is effective for most purposes on Sept. 16, 2013 and is primarily prospective; however, it may be relied on retroactively for purposes of filing tax returns, amending returns and certain credit or refund claims for income and employment taxes regarding exclusions from income based on an individual’s marital status for employer-provided health benefits and certain fringe benefits.

HOW DOES WINDSOR AFFECT RETIREMENT PLANS?
The Internal Revenue Code requires certain benefits and options for spouses, such as default survivor annuity benefits for married participants and qualified domestic relations orders for the assignment of retirement benefits during a legal separation or divorce. The guidance clarifies that, effective Sept. 16, 2013, retirement plans must recognize the spouses of same-sex marriages and extend to them the same rights that spouses in opposite sex marriages previously enjoyed. Future guidance will address the application of Windsor for periods prior to Sept. 16, 2013, and will provide sufficient time for employers to amend and correct their qualified plans as necessary to avoid disqualification and preserve favorable tax treatment.

HOW DOES WINDSOR AFFECT THE TAX TREATMENT OF HEALTH, WELFARE AND OTHER FRINGE BENEFITS?
Before Windsor, employees were taxed on health, welfare and other fringe benefits provided to their same-sex spouses, domestic partners or partners in a civil union. As a result, employers had to impute income on the employee’s W-2 for such benefits. According to Rev. Rul. 2013-17, health, welfare and other fringe benefits for legally married same-sex spouses are generally excluded from income for federal tax purposes. However, employees will still be taxed on employer-provided benefits extended to domestic partners and civil union partners unless the partner qualifies as the employee’s dependent.

WHAT OTHER CHANGES WILL BE REQUIRED FOR HEALTH AND WELFARE PLANS?
Certain health plan requirements, such as HIPAA special enrollment rights and COBRA continuation coverage for recognized same-sex spouses, may require amendments to health plans that cover spouses. Employers will also need to revise cafeteria plans to allow premium reimbursement for same-sex spouse coverage pre-tax and to permit the reimbursement of the medical expenses of same-sex spouses by health flexible spending arrangements. The FAQs indicate that all limits and rules applicable to opposite sex married couples now apply to legally married same-sex couples. Notably, plans must impose a single family maximum contribution to both spouses in a same-sex marriage.

DOES THE WINDSOR DECISION CHANGE RIGHTS RETROACTIVELY?
Rev. Rul. 2013-17 clarifies that the Windsor decision will be applied retroactively, although to what extent remains an open question. Among the possibilities, the IRS could take an expansive view of retroactivity for retirement plans, since the IRS’s correction program already allows for (and generally requires) correction for closed tax years. Rev. Rul. 2013-17 promises future guidance on Windsor’s retroactive impact for employee benefit plans.

FOR EMPLOYERS IN STATES THAT DO NOT RECOGNIZE SAME-SEX MARRIAGE, WILL ANYTHING CHANGE?
Yes, all employers must be prepared to amend and administer plans to reflect federal tax law recognition of legally married same-sex spouses. Depending on state law, the value of health coverage and certain fringe benefits provided to legally married same-sex spouses in states that do not recognize same-sex marriage will be tax-free for federal income tax purposes but may still be taxable for state income tax purposes.

CAN EMPLOYERS AND EMPLOYEES OBTAIN REFUNDS FOR TAXES ALREADY PAID ON THE VALUE OF EMPLOYER-PROVIDED HEALTH COVERAGE OR FRINGE BENEFITS FOR THE EMPLOYEE’S SAME-SEX SPOUSE?
As long as the statute of limitations on refund claims is still open (generally, 2010, 2011 and 2012 for most taxpayers), employers that paid Social Security and Medicare (FICA) taxes may file refund claims to recover those taxes and affected employees may file for income tax refund claims paid with respect to the following benefits: employer contributions for health plan coverage, qualified tuition reductions, meals and lodging furnished to an employee for the convenience of the employer, dependent care assistance, and no additional cost services, employee discounts, retirement planning services and on-premises gym facilities. In addition, employees may file income tax refund claims with respect to amounts an employee paid on an after-tax basis for health benefits for a same-sex spouse if the employer had a cafeteria plan and the employee made pre-tax salary reductions for his or her own coverage. The IRS intends to issue guidance with a streamlined process for employers to file FICA tax refund claims.

WHAT SHOULD EMPLOYERS DO NOW?
Starting Sept. 16, 2013, any same-sex spouse must be recognized prospectively if benefits are required under federal tax law (for example, survivor annuities, consent requirements) or if plans are already extending benefits to same-sex spouses. Employers must prepare now to implement plan design and administration changes, as well as plan communications to describe those changes. While awaiting further guidance, employers should take the following steps:
* Identify benefits currently available for spouses under its benefit plans (e.g. death benefits, medical coverage eligibility, reimbursements for spousal expenses).
* Review how each plan defines “spouse” and “marriage.”
* Interpret “spouse” and “marriage” to include same-sex spouses as of Sept. 16, 2013.
* Gather workforce data: for example, which employees have entered into legally recognized same-sex marriages, domestic partnerships, and/or civil unions, and in which states they reside.
* Stop imputing income (and withholding employment taxes) for health and other fringe benefits provided to employees with same-sex spouses, and make adjustments for current year federal income tax withholding by year-end.
* Consider the company’s goals — does the employer wish to extend benefits to all same sex couples or other relationships recognized under state law.
* Manage litigation risks through the use of thoughtful, honest communications with employees who inquire about benefits while the company is assessing its options.

 

Joseph T. Clees and Nonnie L. Shivers are shareholders in the Phoenix office of Ogletree, Deakins, Nash, Smoak & Stewart, P.C.

same.sex

The impact of the Supreme Court’s Windsor ruling

Section 3 of the Defense of Marriage Act (“DOMA”) defined marriage under federal law as a legal union between one man and one woman. In June, the Supreme Court declared that provision unconstitutional in U.S. v. Windsor (No. 12-307, June 26, 2013). On Aug. 29, 2013, the Department of the Treasury and the IRS jointly issued initial guidance on how Windsor affects federal tax law. Here are answers to some questions that will help clarify the impact.

AFTER WINDSOR, WHAT CONSTITUTES A MARRIAGE FOR TAX PURPOSES?
Rev. Rul. 2013-17 states that a marriage is recognized for federal tax purposes if the marriage was validly entered into in any one of the 50 states, the District of Columbia, a U.S. territory or foreign country whose laws authorize the marriage of same sex individuals. Even if a married couple resides in a state where the marriage is not recognized under state law, federal tax law will treat the same-sex couple as legally married. Rev. Rul. 2013-17 does not extend such recognition to other relationships recognized under state law that are not “marriages,” such as registered domestic partnerships or civil unions.

WHEN IS REV. RUL. 2013-17 EFFECTIVE?
The ruling is effective for most purposes on Sept. 16, 2013 and is primarily prospective; however, it may be relied on retroactively for purposes of filing tax returns, amending returns and certain credit or refund claims for income and employment taxes regarding exclusions from income based on an individual’s marital status for employer-provided health benefits and certain fringe benefits.

HOW DOES WINDSOR AFFECT RETIREMENT PLANS?
The Internal Revenue Code requires certain benefits and options for spouses, such as default survivor annuity benefits for married participants and qualified domestic relations orders for the assignment of retirement benefits during a legal separation or divorce. The guidance clarifies that, effective Sept. 16, 2013, retirement plans must recognize the spouses of same-sex marriages and extend to them the same rights that spouses in opposite sex marriages previously enjoyed. Future guidance will address the application of Windsor for periods prior to Sept. 16, 2013, and will provide sufficient time for employers to amend and correct their qualified plans as necessary to avoid disqualification and preserve favorable tax treatment.

HOW DOES WINDSOR AFFECT THE TAX TREATMENT OF HEALTH, WELFARE AND OTHER FRINGE BENEFITS?
Before Windsor, employees were taxed on health, welfare and other fringe benefits provided to their same-sex spouses, domestic partners or partners in a civil union. As a result, employers had to impute income on the employee’s W-2 for such benefits. According to Rev. Rul. 2013-17, health, welfare and other fringe benefits for legally married same-sex spouses are generally excluded from income for federal tax purposes. However, employees will still be taxed on employer-provided benefits extended to domestic partners and civil union partners unless the partner qualifies as the employee’s dependent.

WHAT OTHER CHANGES WILL BE REQUIRED FOR HEALTH AND WELFARE PLANS?
Certain health plan requirements, such as HIPAA special enrollment rights and COBRA continuation coverage for recognized same-sex spouses, may require amendments to health plans that cover spouses. Employers will also need to revise cafeteria plans to allow premium reimbursement for same-sex spouse coverage pre-tax and to permit the reimbursement of the medical expenses of same-sex spouses by health flexible spending arrangements. The FAQs indicate that all limits and rules applicable to opposite sex married couples now apply to legally married same-sex couples. Notably, plans must impose a single family maximum contribution to both spouses in a same-sex marriage.

DOES THE WINDSOR DECISION CHANGE RIGHTS RETROACTIVELY?
Rev. Rul. 2013-17 clarifies that the Windsor decision will be applied retroactively, although to what extent remains an open question. Among the possibilities, the IRS could take an expansive view of retroactivity for retirement plans, since the IRS’s correction program already allows for (and generally requires) correction for closed tax years. Rev. Rul. 2013-17 promises future guidance on Windsor’s retroactive impact for employee benefit plans.

FOR EMPLOYERS IN STATES THAT DO NOT RECOGNIZE SAME-SEX MARRIAGE, WILL ANYTHING CHANGE?
Yes, all employers must be prepared to amend and administer plans to reflect federal tax law recognition of legally married same-sex spouses. Depending on state law, the value of health coverage and certain fringe benefits provided to legally married same-sex spouses in states that do not recognize same-sex marriage will be tax-free for federal income tax purposes but may still be taxable for state income tax purposes.

CAN EMPLOYERS AND EMPLOYEES OBTAIN REFUNDS FOR TAXES ALREADY PAID ON THE VALUE OF EMPLOYER-PROVIDED HEALTH COVERAGE OR FRINGE BENEFITS FOR THE EMPLOYEE’S SAME-SEX SPOUSE?
As long as the statute of limitations on refund claims is still open (generally, 2010, 2011 and 2012 for most taxpayers), employers that paid Social Security and Medicare (FICA) taxes may file refund claims to recover those taxes and affected employees may file for income tax refund claims paid with respect to the following benefits: employer contributions for health plan coverage, qualified tuition reductions, meals and lodging furnished to an employee for the convenience of the employer, dependent care assistance, and no additional cost services, employee discounts, retirement planning services and on-premises gym facilities. In addition, employees may file income tax refund claims with respect to amounts an employee paid on an after-tax basis for health benefits for a same-sex spouse if the employer had a cafeteria plan and the employee made pre-tax salary reductions for his or her own coverage. The IRS intends to issue guidance with a streamlined process for employers to file FICA tax refund claims.

WHAT SHOULD EMPLOYERS DO NOW?
Starting Sept. 16, 2013, any same-sex spouse must be recognized prospectively if benefits are required under federal tax law (for example, survivor annuities, consent requirements) or if plans are already extending benefits to same-sex spouses. Employers must prepare now to implement plan design and administration changes, as well as plan communications to describe those changes. While awaiting further guidance, employers should take the following steps:
* Identify benefits currently available for spouses under its benefit plans (e.g. death benefits, medical coverage eligibility, reimbursements for spousal expenses).
* Review how each plan defines “spouse” and “marriage.”
* Interpret “spouse” and “marriage” to include same-sex spouses as of Sept. 16, 2013.
* Gather workforce data: for example, which employees have entered into legally recognized same-sex marriages, domestic partnerships, and/or civil unions, and in which states they reside.
* Stop imputing income (and withholding employment taxes) for health and other fringe benefits provided to employees with same-sex spouses, and make adjustments for current year federal income tax withholding by year-end.
* Consider the company’s goals — does the employer wish to extend benefits to all same sex couples or other relationships recognized under state law.
* Manage litigation risks through the use of thoughtful, honest communications with employees who inquire about benefits while the company is assessing its options.

 

Joseph T. Clees and Nonnie L. Shivers are shareholders in the Phoenix office of Ogletree, Deakins, Nash, Smoak & Stewart, P.C.

Financial Institutions Receive Bailout

Financial Institutions In Arizona Are Expected To Receive Bailout Money

While most of Arizona’s state-chartered banks were mulling over their options for federal assistance late last year, Uncle Sam was injecting billions of dollars of new capital into national banking companies with Arizona subsidiaries. The question is whether any of that money from the Department of the Treasury’s $700 billion Troubled Asset Relief Program (TARP) will find its way here.

Although there were a couple of exceptions, nationally chartered banks with Arizona operations didn’t know whether portions of their capital infusions would be earmarked for deployment in Arizona, and they may not know until sometime during the first quarter. The capital comes in the form of federal purchases of senior preferred shares. The Treasury set aside $250 billion for the program.

The Treasury purchased $200 million of shares in Seattle-based Washington Federal Inc., the parent company of Washington Federal Savings. John Pirtle, senior vice president and Phoenix division manager for Washington Federal, estimates the thrift’s Arizona operations will receive about $20 million and use it for mortgage lending.

Western Alliance Bancorporation in Las Vegas, owner of Alliance Bank of Arizona, received $140 million from the Treasury. James Lundy, chief executive officer of the Arizona bank, expects his parent company to share the new capital.

“I would expect we’ll get somewhere between $8 million and $12 million,” Lundy says. “That would be a good estimate. We are well capitalized now, but we do have plans to continue our growth trajectory, which has been pretty strong.”

Alliance Bank would use the capital to “support a bigger balance sheet, so we can gather more deposits to make more loans,” Lundy says. “Banks like ours are the ones making loans to small and mid-size businesses. Despite the economic issues Arizona is facing, we have strong loan demand from borrowers we think are very creditworthy.”

Ten million dollars in new capital can be leveraged to generate $100 million in new loans, Lundy says.

The Treasury purchased $1.715 billion of stock in Milwaukee-based Marshall & Illsley Corporation.

“All the funds are going to be used throughout the franchise,” says Dennis Jones, chairman and president of M&I’s Arizona region. “It’s not a matter of allocating a certain amount of it for Arizona.”

Chicago-based Northern Trust Corporation, parent company of Northern Trust Bank, received a $1.576 billion capital infusion. David Highmark, chairman and chief executive officer of the Arizona subsidiary, says he expects enough of the capital will flow to his bank to allow it to keep growing. Northern Trust Bank’s loan volume is two to three times its normal level.

“If our loan volume continues to grow as it has, we will get a portion of that money allocated to us,” Highmark says.

The parent company is classified as well capitalized, “but we knew, based on our growth, that we would ultimately need more capital. This was a timely opportunity for us,” Highmark notes.

Zions Bancorporation in Salt Lake City, owner of National Bank of Arizona, received $1.4 billion from the Treasury. Keith Maio, president and chief executive officer of the Arizona bank, says he expects his bank will receive some of the capital, but the amount has not been determined. Maio says the funds will be used to bolster the bank’s capital ratios to keep it actively lending, targeting small to medium-size businesses.

Other Treasury stock purchases of nationally chartered banks with Arizona subsidiaries break down as follows:
JPMorgan Chase & Co., New York — $25 billion.
Bank of America, Charlotte, N.C. — $25 billion.
Wells Fargo & Company, San Francisco — $25 billion.
U.S. Bancorp, Minneapolis, owner of U.S. Bank — $6.599 billion.
Comerica Incorporated, Dallas, owner of Comerica Bank — $2.25 billion.
Mutual of Omaha in Omaha, Neb., which acquired First National Bank of Arizona, did not apply for TARP funding.

The Treasury gave publicly traded banks the first opportunity to receive capital infusions, with a Nov. 14 deadline to apply for stock purchases. It issued capital-infusion guidelines later for privately held banks, which had until Dec. 8 to apply. According to the Arizona Bankers Association, most of Arizona’s 33 state-chartered banks are privately held and had not applied to the Treasury while they weighed their options as their deadline neared. Jack Hudock with the Arizona Department of Financial Institutions said eight state-chartered banks or bank holding companies had applied, but he could not identify them and did not know the status of their applications.

Meridian Bank of Arizona, a privately held, nationally chartered bank owned by Marquette Financial Companies in Minneapolis, applied for a federal stock purchase and was awaiting a decision from the Treasury concerning how much capital it might receive. Doug Hile, president and CEO of Meridian, is not happy that publicly traded banks had first shot at a capital infusion. He does not mince his words in his displeasure over how the government treated privately held banks.

“From a public policy perspective, it’s not fair to small banks that have opted not to go public with their stock,” Hile says. “We are up in arms about it. This is harming Main Street banking by not allowing them to participate on an equal basis.”