Earlier this week, the IRS released Notice 2014-1, which provides guidance on the application of the new rules concerning same-sex marriages, following the Supreme Court’s decision in United States v. Windsor, to cafeteria plans (including health and dependent care flexible spending arrangements (“FSAs”)) and to health savings accounts (“HSAs”). This guidance follows up other guidance interpreting the Windsor decision, including Revenue Ruling 2013-17, which announced the IRS’s position that same-sex couples who are legally married in states that recognize their marriage will be treated as legally married for federal tax purposes regardless of whether the marriage is recognized in their current state of residence (the so-called “state of celebration” rule) (see 9/6/13 EmployNews article IRS Issues Initial Guidance on Same-Sex Marriage]).
While plan amendments are not required before the end of 2013, employers that want to take advantage of certain guidance set forth in Notice 2014-1 will need to move quickly. Some of the items addressed in Notice 2014-1 include:
- Effective immediately, employees in same-sex marriages may change their cafeteria plan elections to reflect their marriages, even if their marriages took place prior to 2013. With respect to election changes made due to the Windsor decision, an election may be accepted by the cafeteria plan if filed at any time during the cafeteria plan year that includes June 26, 2013 (the date of the Windsor decision) or the cafeteria plan year that includes December 16, 2013 (the date of Notice 2014-1). For calendar year plans, this change would need to be communicated to employees before the end of 2013 in order to permit employees to make election changes in 2013.
- Employees generally may use benefits remaining in their FSAs (including health FSAs, dependent care FSAs, and adoption assistance FSAs) to reimburse eligible expenses of their same-sex spouses (or the same-sex spouse’s dependents) that were incurred during 2013, even if the employee initially elected self-only coverage under the FSA. Again, availability of this benefit would need to be communicated before the end of the year.
- If an employer receives notice before the end of the cafeteria plan year that includes December 16, 2013 that a participant has a same-sex spouse receiving health coverage on an after-tax basis, the employer must begin treating the amount that the employee pays for the spousal coverage on a pre-tax basis no later than: (i) the date that a change in marital status would be required to be reflected for income tax withholding purposes or (ii) a reasonable period of time after December 16, 2013. An employee may provide notice of a same-sex marriage to his/her employer by making an election under the cafeteria plan to pay for the employee cost of spousal coverage through salary reduction or by filing a revised Form W-4 representing that he/she is married
- If an employee who has paid for same-sex spousal coverage on an after-tax basis makes an election to pay for coverage on a pre-tax basis, his/her salary reduction election is deemed to include the employee cost of spousal coverage, even if the employer reports the amounts as taxable income and wages to the participant. As a result, the amount paid by the participant for spousal coverage is excluded from his/her gross income and is not subject to federal income or federal employment taxes (state results will vary). This rule applies to the cafeteria plan year that includes December 16, 2013 and to prior open years.
- A same-sex married couple is subject to the joint deduction limit for contributions to an HSA. If both spouses have made contributions to separate HSAs that in combination exceed the applicable HSA contribution limit for a married couple, the excess must be corrected in accordance with applicable rules.
- A same-sex married couple also is subject to the maximum annual contribution limit to a dependent care FSA for a married couple. Any excess based on their combined contributions must be corrected in accordance with applicable rules.
If a cafeteria plan permits an election change upon a change in marital status, a plan amendment generally is not required. To the extent an employer chooses to permit election changes that were not previously provided for in the cafeteria plan, the plan must be amended on or before the last day of the first plan year beginning on or after December 16, 2013 (e.g., on or before December 31, 2014 for calendar year plans) and may be effective retroactively to the first day of the plan year including December 16, 2013 (e.g., January 1, 2013 for calendar year plans), provided the plan is operated in accordance with Notice 2014-1.