Following the U.S. Supreme Court’s decision that the Defense of Marriage Act’s (“DOMA”) restriction on marriage to opposite-sex spouses for purposes of federal law is unconstitutional, the IRS issued initial guidance on how the ruling affects employee benefit plans in Revenue Ruling 2013-17 [see United States v. Windsor, 133 S. Ct. 2675 (2013)] (see our August 2013 article). While additional guidance is still needed, on December 16, 2013, the IRS issued Notice 2014-1 (the “Notice”), which contains a helpful set of “Questions and Answers” regarding the rules under Sections 125 and 223 of the Internal Revenue Code and how they relate to the participation by same-sex spouses. The Notice provides employers with guidance on mid-year election plan changes, reimbursement for expenses incurred by a same-sex spouse or the same-sex spouses’ dependents by flexible spending accounts (“FSAs”), and on contribution limits for health savings accounts (“HSAs”) and dependent care FSAs.
Mid-Year Election Change and Tax Treatment of Coverage
Windsor Marks a Change in Legal Marital Status
The guidance provides that if a participant was lawfully married to a same-sex spouse as of the date of the Windsor decision (June 26, 2013), a Section 125 cafeteria plan may treat the participant as though he or she experienced a change in legal marital status for purposes of the mid-year election rules of Treasury Regulations Section 1.125-4(c)1. This means that a Section 125 cafeteria plan may permit the participant to revoke his/her election and make a new election provided it is consistent with the change in legal marital status. For example, a participant may increase his/her pre-tax salary reduction to pay for his/her spouse’s coverage with pre-tax dollars instead of after-tax dollars. Under the notice, an election change may be made:
- At any time during the plan year that includes June 26, 2013 or December 16, 2013
- For participants who marry a same-sex spouse after June 26, 2013, at any time after June 26, 2013
Such an election change must take effect no later than the later of:
- the date that coverage under the plan would be added under the plan’s usual procedures for change in status elections; or
- a reasonable period of time after December 16, 2013.
Windsor Is Not a Significant Change in the Cost of Coverage
While the guidance clarifies that the Windsor decision constitutes a change in legal marital status, it also makes clear that the Windsor ruling DOES NOT constitute a significant change in the cost of coverage. However, the Notice states that given the uncertainty regarding the application of the Section 125 election change rules after the Windsor decision, plans which permitted participants to change their elections on that basis between June 26, 2013 and December 31, 2013, will not be treated as having violated the requirements of Section 125 or the election change rules, as the change would have been permitted as a change in legal marital status.
Change from After-Tax to Pre-Tax Dollars
The guidance clarifies that if a participant elected to pay for his or her employee cost of coverage with pre-tax dollars and pays for his or her same-sex spouse’s coverage with after-tax dollars, the plan must allow the participant to pay for his or her same-sex spouse’s coverage with pre-tax dollars if the participant notifies the plan of his or her same-sex marriage before the end of the plan year including December 16, 2013. Such a change must take effect no later than the later of the following:
- the date that a change in marital status would be required to be reflected for income tax withholding purposes under Section 3402 of the Internal Revenue Code (i.e., by filing a revised Form W-4); or
- a reasonable period of time after December 16, 2013.
Tax Treatment of Same-Sex Spousal Coverage
The notice clarifies that for the cafeteria plan year including December 16, 2013 and any prior years for which the applicable limitations period under Section 6511 has not expired (i.e., 2012, 2011 and 2010), health plan coverage provided to a same-sex spouse is not subject to federal income tax or federal employment tax. Furthermore, the notice states that if a participant pays for his or her own coverage with pre-tax dollars and for his or her same-sex spouse’s coverage with after-tax dollars, the participant’s salary reduction election will be deemed to include the cost of spousal coverage.
Under the guidance, the employee may notify the plan of his or her same-sex marital status to convert his after-tax contributions to pre-tax contributions and/or seek a refund of any federal income or federal employment taxes paid on any amounts paid for spousal health plan coverage. The employee taxpayer may exclude these amounts from gross income when filing his or her income tax return for the year.
The notice confirms that a health FSA, dependent care FSA or adoption assistance FSA may reimburse the eligible expenses incurred by a participant’s same-sex spouse or the same-sex spouse’s dependent that were incurred during the period beginning on the date that is no earlier than:
- the beginning of the cafeteria plan year that includes the date of the Windsor decision (June 26, 2013), or
- the date of the marriage, if later.
For example, a health FSA with a calendar year plan year, may reimburse an expense incurred by a participant’s same-sex spouse on July 15, 2013 if the expense is properly substantiated and timely submitted for reimbursement and the participant represents that he or she was legally married to the spouse on or before that date.
Contribution Limits for HSAs and Dependent Care FSAs
As same-sex marriages are now treated in the same manner as opposite-sex marriages for federal tax law purposes, the guidance clarifies that the HSA joint deduction limit for contributions for married couples who elect family coverage under a high deductible health plan ($6,450 for the 2013 taxable year) also applies to same-sex married couples. The guidance further states that if the combined contribution by same-sex spouses exceeds the applicable limit, the contributions for one or both of the spouses may be reduced for the remaining portion of the tax year to avoid the excess, or the excess may be distributed from the HSAs of one or both of the spouses no later than the tax return due date for the spouses as permitted by Internal Revenue Code Section 223(f)(3), i.e., April 15, 2014, for the 2013 taxable year. If the excess contribution is not timely corrected, the excess will be subject to a 6% excise tax under Section 4973 of the Code.
The guidance also clarifies that the $5,000 married couple contribution limit applicable to dependent care FSAs also applies to same-sex married couples, starting with the 2013 taxable year. If the combined contribution of same-sex spouses exceeds this limit and the plan year has not yet ended, the elections of one or both spouses may be reduced to comply with the limit. If the plan year has ended, or reducing the contribution is not enough to avoid exceeding the limit, the amount of the excess contribution must be included in the spouses’ gross income as provided in Section 129(a)(2)(B) of the Internal Revenue Code.
If you have any questions regarding the foregoing, please contact the author of this article.
1 Under Revenue Ruling 2013-17, for purposes of federal tax law, the terms “spouse”, “husband and wife”, “husband”, and “wife” include an individual married to a person of the same sex if they are lawfully married under state law, and the term “marriage” includes a marriage between individuals of the same sex, but not a registered domestic partnership, civil union or other formal relationship recognized under the state law. Revenue Ruling 2013-17 also adopts the “state of celebration” rule which recognizes same-sex marriages that were validly entered into a state that recognizes such marriages even if the couple is domiciled in a state that does not recognize same-sex marriages.