The IRS continues to consider the effects of the Supreme Court’s Windsor decision on federal tax law, and its most recent guidance deals with elections and reimbursements for cafeteria plans, health savings accounts (HSAs), and health, adoption, and dependent care flexible spending arrangements (FSAs) (Notice 2014-1). Windsor, 133 S. Ct. 2675 (2013), held that Section 3 of the Defense of Marriage Act (DOMA), P.L. 104-199, is unconstitutional, and in August the IRS announced that same-sex couples who are legally married in jurisdictions that recognize their marriages will thus be treated as married for federal tax purposes.
Health Coverage Rules
The new guidance, issued in question-and-answer format, allows a plan to permit a plan participant who was legally married to a same-sex spouse on June 26, 2013 (the date of the Windsor decision), to revoke an existing cafeteria plan election and make a new one if the election is made at any time in the cafeteria plan year that includes June 26, 2013, or Dec. 16, 2013 (the date of the notice). A participant who marries a same-sex spouse after June 26, 2013, can make a midyear election change due to the change in the participant’s marital status (Q&A No. 1).
If a cafeteria plan permitted participants to change their elections under the cafeteria plan because the plan administrator interpreted Windsor as requiring it to allow a change because the change in the tax treatment of benefits under the plan was a significant change in the cost of coverage under Regs. Sec. 1.125-4(f), the IRS will permit that interpretation of the rules between June 26, 2013, and Dec. 31, 2013 (but not afterward) (Q&A No. 2).
For employees who had elected after-tax coverage of same-sex spouses, if they notify their employer before the end of a plan year that includes Dec. 16, 2013, that they are married to the individual receiving after-tax coverage, the employer must begin treating the coverage cost as a pretax salary reduction no later than the later of (1) the date that a change in withholding would be required under Sec. 3402 to be reflected in income tax withholding or (2) a reasonable period of time after Dec. 16, 2013. The employee may provide this notice by electing under the rules discussed in Q&A No. 1 above or by filing a revised Form W-4, Employee’s Withholding Allowance Certificate (Q&A No. 4). Employees can either continue to pay for same-sex spouses’ benefits on an after-tax basis or notify the employer of their marital status before the end of 2013. In either case, employees can seek refunds of overpaid income or employment taxes when they file their income tax return (Q&A No. 5).
FSA Reimbursement Rules
FSA reimbursement for adoption, health care, and dependent care expenses is permitted for participants’ legally married same-sex spouses for a cafeteria plan year that includes the date of the Windsor decision. For a calendar-year plan for 2013, that means that these expenses may be reimbursed if they are incurred as early as Jan. 1, 2013 (or the date the spouses were married, if later) (Q&A No. 6).
Contribution Limits for HSAs and Dependent Care Programs
HSAs have contribution limits for married couples who elect family coverage under a high-deductible health plan. The 2013 limit is $6,450. For same-sex married couples who are married at the end of 2013, these limits apply on a combined basis. Couples who had separately elected these contributions before the Windsor decision are nonetheless subject to the limit. To avoid an excise tax under Sec. 4973 for excess contributions to the plan, one or both spouses can either have their remaining contributions for the rest of the year reduced or have the excess distributed to them as permitted under Sec. 223(f)(3), which must be done before the due date (including extensions) of their tax return (Q&A No. 7 and No. 8).
For the $5,000 contribution limit for dependent care FSAs, which also applies on a combined basis, the couple can either reduce the amount being withheld for the rest of 2013 or include the excess in their gross income under Sec. 129(a)(2)(B) (Q&A No. 9 and No. 10).
Plan amendments to permit adoption of these rules are not necessary to the extent the plan already provides for a change in election upon a change in marital status. To the extent a cafeteria plan sponsor wants to permit election changes different from those already in the plan to implement these rules, the plan must be amended on or before the last day of the plan year beginning on or after Dec. 16, 2013, and can be effective retroactively to the first day of the plan year including Dec. 16, 2013, provided that the cafeteria plan operates in accordance with the guidance under this notice.