The IRS has provided guidance on how employees should treat amounts wrongfully included in their W-2 income for the premiums their employers paid for their same-sex spouses’ health insurance.
In IRS Information Letter 2014-0012, the tax agency advises employees to request a corrected W-2 or, if that fails, to take specific steps to report a corrected amount of taxable income.
Facts of the Specific Case
A taxpayer added health coverage for her same-sex spouse under her employer’s health plan in November of 2013. The value of health coverage for the same-sex spouse was included in the taxpayer’s gross income on her Form W-2,Wage and Tax Statement, for 2013.
The taxpayer asked the IRS how she can subtract the value of this spousal coverage when filing her 2013 tax return.
Background on the Issue
The Supreme Court declared Section 3 of the Defense of Marriage Act, which had prohibited the recognition of same-sex couples as spouses for purposes of federal law, unconstitutional in June of 2013. The Windsor case generally provides that a same-sex spouse will be treated as a spouse for federal tax purposes — provided the couple is lawfully married under state law.
In Notice 2014-1, the IRS provided additional guidance on the effect of the Windsor decision. It addresses the application of the rules under Internal Revenue Code Section 125 (related to cafeteria plans, including health and dependent care flexible spending arrangements) to participation by same-sex spouses in employer health plans.
The gross income of an employee doesn’t include contributions that his or her employer makes to an accident or health plan for compensation (through insurance or otherwise) to the employee for personal injuries or sickness incurred by the employee, the employee’s spouse and dependents, and certain other individuals.
Coverage Value Is Not Taxable
The IRS stated that, under Code Section 106 and Code Section 125 (as further interpreted by Notice 2014-1), the employer-paid portion of health insurance coverage for a same-sex spouse can be excluded from the taxpayer’s gross income. If the employer offers the health coverage through a cafeteria plan that permits employees to pay the employee portion of the cost of coverage through pre-tax salary reduction, and if the taxpayer paid for the cost of his or her own health coverage on a pre-tax basis, then any amounts paid on an after-tax basis for spousal coverage would also be excludable from the taxpayer’s income.
Accordingly, the taxpayer will be entitled to a refund of any federal income taxes paid on the value of spousal health coverage under the employer’s health plan, provided that the spouse is the taxpayer’s legal spouse under IRS Revenue Ruling 2013-17.
To exclude the value of the spousal health coverage that was reported as taxable wages to a taxpayer on Form W-2, an individual should take the following steps:
- First, contact the employer and request a corrected W-2 form that doesn’t include the value of any excludable spousal health coverage in taxable wages.
- If the employer issues a corrected Form W-2, the taxpayer can then use the amounts reported on the corrected Form W-2 when filing a tax return.
- If the employer does not issue a corrected Form W-2, the taxpayer should file Form 1040, U.S. Individual Income Tax Return, using the original Form W-2 from the employer and should also attach 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.
The taxpayer should also take the following steps when completing Form 4852 and Form 1040:
- On Form 4852, check the box indicating that he or she received an incorrect Form W-2 for 2013.
- Subtract the value of any excludable spousal health coverage from the taxable wages reported in Box 1 of Form W-2, and list this result on line 7(a) of Form 4852.
- Subtract the value of any excludable spousal health coverage that was included in Medicare wages reported in Box 5 of Form W-2, and list this result on line 7(c) of Form 4852.
- If the taxpayer’s wages were subject to Social Security tax, as a general rule, list on line 7(b) of Form 4852 the lesser of $113,700 or the amount listed on line 7(c) of Form 4852. If her wages were not subject to Social Security tax, list on line 7(b) of Form 4852 the amount of Social Security wages reported in Box 3 of Form W-2.
- Copy the amounts reported on Form W-2 to the appropriate places on lines 7(d) through (j) of Form 4852.
- Complete line 9 of Form 4852 explaining that the amounts reported on Form W-2 included the value of excludable spousal health coverage and that these amounts have been excluded on Form 4852 as permitted by IRS Revenue Ruling 2013-17 and Notice 2014-1. Also explain how the value of excludable spousal health coverage was determined (for instance, by referring to the amount reported as taxable health coverage on paystubs).
- Complete line 10 of Form 4852 explaining all steps taken to request a corrected Form W-2 from the employer.
- When completing Form 1040, use the amounts listed on Form 4852 instead of the amounts listed on Form W-2.
- After attaching Form 4852 and Form W-2 to Form 1040, sign and date both forms.
The IRS stated that the taxpayer may also be entitled to a refund of federal employment taxes (Social Security and Medicare) paid on the value of excludable spousal health coverage, provided that the spouse is the taxpayer’s legal spouse under state law. The taxpayer might wish to contact his or her employer to determine if the employer will seek a refund of these amounts on the taxpayer’s behalf. If the employer will not be seeking a refund, the taxpayer may file Form 843, Claim for Refund and Request for Abatement, and include all necessary attachments listed in the instructions for Form 843.
For more information and assistance, consult with your tax adviser.