The Internal Revenue Service has provided additional guidance on the effect of the Supreme Court’s decision in the Windsor case on same-sex married persons who participate in Cafeteria Plans, Flexible Spending Arrangements, Health Savings Accounts.
In the Windsor case, the Supreme Court decided that the federal government had to treat same-sex spouses who were legally married in a State that recognized same-sex marriage the same as opposite-sex spouses. The Windsor case was decided on June 26, 2013. Following that decision, the IRS has been providing guidance on the impact of that decision under federal tax laws.
The most recent guidance (Notice 2014-1, issued December 16, 2013) deals with cafeteria plans, FSAs, HSAs and DCAPs.
Mid-Year Election Changes
In general, cafeteria plan rules permit a participant to make an election change on account of and consistent with the participant’s marriage. The guidance provides that a cafeteria plan may treat a participant who was married to a same-sex spouse as of the date of the Windsor decision (June 26, 2013) as if the participant experienced a change in legal marital status. Accordingly, a cafeteria plan may permit such a participant to make an election change based on a change in marital status if it is filed at any time during the cafeteria plan year that includes June 26, 2013, or the cafeteria plan year that includes December 16, 2013.
In some cases, a participant may have been paying the cost of employee coverage on a pre-tax basis and the cost of spousal coverage on a post-tax basis. The guidance provides an employer that, before the end of the cafeteria plan year including December 16, 2013, receives notice that such a participant is married to the individual receiving health coverage must begin treating the amount that the employee pays for the spousal coverage as a pre-tax salary reduction under the plan no later than the later of (a) the date that a change in legal marital status would be required to be reflected for income tax withholding purposes; or (b) a reasonable period of time after December 16, 2013.
A participant may provide notice of the participant’s marriage to the individual receiving health coverage by making an election under the employer’s cafeteria plan to pay for the employee cost of spousal coverage through salary reduction. The participant may also file a revised Form W-4 representing that the participant is married.
A cafeteria plan may permit a participant’s FSA, including a health, dependent care, or adoption assistance FSA, to reimburse covered expenses of the participant’s same-sex spouse or the same-sex spouse’s dependent that were incurred during a period beginning on a date that is no earlier than (a) the beginning of the cafeteria plan year that includes June 26, 2013 or (b) the date of marriage, if later.
Contribution Limits for HSAs
While the Windsor decision generally resulted in broader benefits for same-sex spouse, there are a few circumstances where it has the opposite effect. One such instance relates to contribution limits for HSAs.
Prior to Windsor, same-sex married couples were not regarded as married so each partner, if otherwise eligible, could make up to the maximum contribution for family coverage. This could occur, for example, where each partner has family coverage under an HDHP. Post-Windsor, the partners are regarded as married and therefore limited to only one family contribution. While this is primarily a tax problem for the plan participants (which can be corrected by taking a timely curative distribution), employers who make contributions to their employees’ HSA may want to make sure that they are not creating issues by over-contributing. In addition, where an employer has reason to believe that its HSA contributions would exceed the applicable limit, the employer may have an obligation to withhold income, FICA, and FUTA or taxes on the excess.
A plan amendment is not required to permit election changes resulting from the marriage of same-sex spouses if the plan already permits such changes for marriages of opposite-sex spouses. However, if the plan does need to be amended to permit such election changes, the amendment may be retroactive to the first day of the plan year that includes December 16, 2013, provided that the amendment is made on or before the last day of the plan year beginning on or after December 16, 2013.
Notice 2014-1 also includes guidance relevant to Dependent Care FSAs (DCAPs).