Prior to the U.S. Supreme Court’s Windsor decision that repealed Section 3 of the federal Defense of Marriage Act (DOMA), same-sex spouses were not recognized as spouses for federal tax and benefits purposes. In the immediate aftermath of Windsor, the Internal Revenue Service (IRS) issued Revenue Ruling 2013-17, which stated the IRS position that, for federal tax purposes, the term “spouse” now includes legally married same-sex couples regardless of whether their state of residence permits same-sex marriage. As a result, the value of employer-provided health coverage for a same-sex spouse would no longer be taxable under federal law, and employees could pay for the coverage on a pre-tax basis through an employer’s cafeteria plan. Employees also could obtain reimbursement for same-sex spouses’ expenses under health care and other reimbursement plans.
On December 16, 2013, the IRS supplemented that guidance with the release of Notice 2014-1, written in Q&A format with examples. Notice 2014-1 clarifies several issues for plan sponsors and administrators of cafeteria plans, flexible spending accounts (FSAs) and health savings accounts (HSAs). First, it allows an employer to permit an employee to make a mid-year election change under its cafeteria plan with regard to health coverage for a same-sex spouse. Second, it provides that an employee may be reimbursed from his or her health care FSA for expenses incurred by a same-sex spouse during the 2013 plan year, even before the date of the Windsor decision (but no earlier than the date of the marriage). Third, it confirms that a same-sex married couple is subject to the joint limits applicable to married couples under HSAs and dependent care plans.
Mid-Year Election Changes under Cafeteria Plans
In the wake of Windsor, employers were confronted with the question of whether they could allow an employee who was married to a same-sex spouse before the date of the Windsor decision to enroll the spouse in employer-provided health coverage or, if the spouse was already covered under the plan, to make an election change to pay for the coverage on a pre-tax basis. Since mid-year election changes under a cafeteria plan are permitted only in limited circumstances where there has been a “change in status” recognized under Section 125 of the Internal Revenue Code (the Code), the answer to this question was not clear. In the absence of specific guidance, some employers took the position that the Windsor decision itself was a change in legal marital status for such an employee (since the marriage was now, but was not previously, recognized under federal law) and, therefore, this was a permissible election change.
Notice 2014-1 confirms that it was (and is) permissible for a cafeteria plan to allow a participant who was already married to a same-sex spouse as of the date of the Windsor decision to make an election change, treating the employee as if he experienced a change in legal marital status due to the Windsor decision. Cafeteria plans may accept such election changes at any time during the plan year that includes June 26, 2013 (i.e., the date of the Windsor decision) or December 16, 2013 (the effective date of the Notice). In addition, a mid-year election change due to a marriage that occurs after the date of the Windsor decision is permissible.
On a related note, the IRS makes clear that the change in federal tax treatment of a same-sex spouse’s health benefits (as a result of Windsor) does not constitute a “significant change in the cost of coverage” under the Code Section 125 change in status rules; but, in light of the legal uncertainty created by Windsor and the fact that the Notice in any event recognizes Windsor as a change in legal marital status, .employers that allowed such changes will not be treated as having failed to comply with Section 125.
Windsor-related election changes will generally be effective as of the date other changes become effective under the plan rules. In addition, with respect to election changes made between June 26 and December 16, 2013, the IRS explained that a plan will not be treated as failing to meet the Code Section 125 requirements to the extent that coverage becomes effective no later than the later of: (i) the date that coverage would be added under the plan’s usual procedures for change-in-status elections, or (ii) a reasonable period of time after December 16, 2013.
Pre-Tax Premium Payments for Spousal Health Coverage
Notice 2014-1 states that if the employer is notified before the end of the plan year that includes December 16, 2013 (i.e., by December 31, 2013 for a calendar year plan) that a participant is married to his or her same-sex partner (who is covered under the plan), the employer must begin treating the employee contribution as a pre-tax salary reduction no later than the later of (i) the date that a change in legal marital status would be required to be reflected for income tax withholding purposes, or (ii) a reasonable period of time after December 16, 2013. Individuals may notify the employer of the marriage by making a mid-year election change to pay for coverage on a pre-tax basis (as permitted by the Notice) or by filing a revised Form W-4 reflecting the change in marital status.
To the extent that an employee paid for a same-sex spouse’s health coverage on an after-tax basis, the guidance makes clear that, for the plan year including December 16 (and prior years for which the limitations period for filing a tax refund claim has not expired), the amounts paid by the employee for the spousal coverage are excluded from the employee’s gross income and not subject to federal income and employment taxes, and an employee may seek a refund for taxes paid on such amounts.
Notice 2014-1 also provides that an employee may be reimbursed from his or her health care FSA for expenses incurred by a same-sex spouse during the 2013 plan year, even before the date of the Windsor decision (but no earlier than the date of the marriage). For example, an FSA with a calendar year plan year may reimburse expenses incurred by the spouse on or after January 1, 2013 (or the date of marriage, if later). The guidance further states that a same-sex spouse may be treated as covered by the FSA even if the participant initially elected coverage under a self-only FSA. These rules also apply to dependent care and adoption assistance FSAs.
Contribution Limits for HSAs and Dependent Care Assistance Programs
Notice 2014-1 confirms that a same-sex married couple (married as of the last day of the taxable year) is subject to the joint deduction limit for contributions made to an HSA where either spouse elects family coverage under a high deductible health plan. If the spouses’ combined elections would exceed the $6,450 limit for the 2013 taxable year, the guidance provides that contributions for one or both of the spouses may be reduced for the remaining portion of the tax year to avoid exceeding the limit. If the contributions already exceed $6,450, the excess may be distributed from the HSAs of one or both spouses no later than the tax return filing deadline for the spouses. Any excess that remains undistributed as of such date will be subject to excise taxes under the Code.
The guidance further provides that a same-sex married couple (married as of the last day of the taxable year) is subject to the maximum annual exclusion from gross income for married couples under a dependent care FSA as of the 2013 taxable year. If the couple’s combined contribution elections exceed $5,000 (or $2,500 per spouse, if married filing separately) for 2013, their contributions may be reduced for the remainder of the year to avoid exceeding the limit. Otherwise, the excess contributions will be includable in their gross income and will be taxed.
Written Plan Amendment
If a cafeteria plan explicitly allows mid-year election changes due to a change in legal marital status, a plan amendment generally is not required in order to permit changes relating to same-sex spouses as a result of the Windsor decision. However, if the plan sponsor chooses to permit Windsor-related election changes that were not previously included in the plan document, the plan must be amended on or before the last day of the first plan year beginning on or after December 16, 2013. For calendar year plans, this means that the plan must be amended by December 31, 2014. The guidance specifically states that the amendment may be effective retroactive to the first day of the plan year that includes December 16, 2013, provided that the plan operates in compliance with the guidance contained in the Notice.