United States: IRS Issues Further Guidance As To Application Of Windsor Decision To Employee Benefit Plans

Last Updated: January 6 2014
Article by Larry R. Goldstein and Sally Doubet-King

Section 3 of the Defense of Marriage Act provided that for federal-law purposes, the word "marriage" meant only a legal union between one man and one woman as husband and wife, and the word "spouse" referred only to a person of the opposite sex who was a husband or a wife. The United States Supreme Court, in United States v. Windsor, __ U.S. __, 133 S.Ct. 2675 (2013), held that section to be unconstitutional. In an earlier article, we discussed the IRS's initial guidance on Windsor, found in Revenue Ruling 2013-17 and accompanying Frequently Asked Questions. In recently issued Notice 2014-1 (the Notice), effective Dec. 16, 2013, the IRS has provided further guidance as to the impact of Windsor on certain types of employee benefit plans. The guidance in the Notice is summarized below.

Cafeteria Plans

The Notice provides the following principles as to mid-year election changes under cafeteria plans:

  • A cafeteria plan under Section 125 of the Internal Revenue Code (Code) 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 for purposes of the cafeteria regulations. Therefore, such a participant can revoke an existing benefit election under a cafeteria plan and make a new election in a manner consistent with the change in legal marital status. Such an election may be accepted by the cafeteria plan if submitted at any time during the cafeteria plan year that includes June 26, 2013, or the cafeteria plan year that includes Dec. 16, 2013.
  • In addition, the Notice provides that a cafeteria plan may also permit a participant who marries a same-sex spouse after June 26, 2013, to make a mid-year election change due to a change in legal marital status.
  • For periods between June 26 and Dec. 31, 2013, a cafeteria plan will not be treated as having violated Section 125 or the regulations thereunder solely because the plan permitted a participant with a same-sex spouse to make a mid-year election change as a result of the plan administrator's interpretation that the change in tax treatment of spousal health coverage arising from the Windsor decision resulted in a significant change in the cost of health coverage.
  • An election made under a cafeteria plan as to a same-sex spouse as a result of the Windsor decision generally takes effect as of the date that any other change in coverage becomes effective for a qualifying benefit that is offered through the cafeteria plan. However, as to a change-in-status election that was made by a participant in connection with the Windsor decision between June 26, 2013 and Dec. 16, 2013, the cafeteria plan will not be treated as having violated Section 125 or the regulations to the extent that coverage under the cafeteria plan becomes effective no later than the later of:
    • the date that coverage under the cafeteria plan would be added under the cafeteria plan's usual procedures for change-in-status elections; or
    • a reasonable period of time after Dec. 16, 2013.

Comments: Following the Windsor decision, some cafeteria plans permitted the election changes described in the Notice. The Notice can thus be seen as a validation of the actions taken by these plans.

The Notice does not refer to specific types of mid-year election changes under a cafeteria plan that are permitted as a result of Windsor. However, the existing cafeteria plan regulations allow a cafeteria plan to permit a change in an election as to a flexible spending arrangement (FSA), as well as a change in an election as to health plan coverage, following a change in status.

Tax Treatment of Premiums paid by Employee for Health Coverage of Same-Sex Spouse

Suppose a cafeteria plan participant has elected to pay for the employee cost of health coverage for the employee on a pre-tax basis through salary reduction under a cafeteria plan, and is also paying the employee cost of health coverage for a same-sex spouse on an after-tax basis. The Notice provides that if an employer, before the end of the cafeteria plan year including Dec. 16, 2013, receives notice that such a participant is married to the individual receiving health coverage, then the employer must begin treating the amount paid by the employee for the spousal coverage as a pre-tax salary reduction under the plan no later than the later of:

  • the date that a change in legal marital status would be required to be reflected for income tax withholding purposes under Code Section 3402; or
  • a reasonable period of time after Dec. 16, 2013.

A participant may provide notice of his or her marriage to the individual receiving health coverage 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 the participant is married.

If a cafeteria plan participant who elected to pay for the employee cost of health coverage for the employee on a pre-tax basis through salary reduction under a cafeteria plan and previously paid for the employee cost of health coverage for a same-sex spouse on an after-tax basis, the Notice provides that the participant's salary reduction election under the plan will be deemed to include the employee cost of spousal coverage, even if the employer reports the amounts as taxable income and wages to the participant. In such a case, the participant may exclude from gross income on his or her income tax return the amount that he or she paid for spousal coverage and such amount will not be subject to either federal income or federal employment taxes. This rule applies to the cafeteria plan year including Dec. 16, 2013 and any prior years for which the applicable limitations period under Code Section 6511 has not expired.

Comment: A cafeteria plan participant will have to file amended tax returns for open years in order to obtain income tax refunds. The Notice is not explicit as to how such a participant may claim a refund of employment taxes, but it is possible that Form 843 will have to be used.

Reimbursements under FSAs for Expenses of Same-Sex Spouse

The Notice allows a cafeteria plan to 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:

  • the beginning of the cafeteria plan year that includes the date of the Windsor decision; or
  • if later, the date of marriage.

The same-sex spouse may be treated as covered by the FSA during that period, even if the participant had initially elected coverage under a self-only FSA. Thus, for example, a cafeteria plan with a calendar year plan year may permit a participant's 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 any date that is on or after Jan. 1, 2013 (or the participant's date of marriage, if later).

Contribution Limits for HSAs

The maximum annual deductible contribution to one or more health savings accounts (HSAs) for a married couple either of whom elects family coverage under a high-deductible health plan is $6,450 for the 2013 taxable year (as adjusted for cost-of-living increases). The Notice explains that this deduction limit applies to same-sex married couples who are treated as married for federal tax purposes as to a taxable year (that is, couples who remain married as of the last day of the taxable year), including the 2013 taxable year.

The Notice also indicates the following:

  • If the combined HSA contributions elected by two same-sex spouses exceed the applicable HSA contribution limit for a married couple, contributions for one or both of the spouses may be reduced for the remaining portion of the tax year in order to avoid exceeding the applicable contribution limit.
  • To the extent that the combined contributions to the HSAs of the married couple exceed the applicable contribution limit, any excess may be distributed from the HSAs of one or both spouses no later than the tax return due date for the spouses, as permitted under Code Section 223(f)(3); any such excess contributions that remain undistributed as of the due date for the filing of the spouse's tax return (including extensions) will be subject to excise taxes under Code Section 4973.

Contribution Limits for Dependent-Care FSAs

The maximum annual contribution to one or more dependent-care FSAs for a married couple is $5,000. The Notice confirms the following applications of this limit to same-sex married couples:

  • The $5,000 limit applies to same-sex married couples who are treated as married for federal tax purposes as to a taxable year (i.e., couples who remain married as of the last day of the taxable year), including the 2013 taxable year.
  • If the combined dependent care FSA contributions elected by the same-sex spouses exceed the applicable contribution limit for a married couple, contributions for one or both of the spouses may be reduced for the remaining portion of the tax year in order to avoid exceeding the applicable contribution limit.
  • To the extent that the combined contributions to the dependent-care FSAs of the married couple exceed the applicable contribution limit, the amount of excess contributions will be includable in the spouses' gross income as provided in Code Section 129(a)(2)(B).

Plan Amendments

The Notice specifies the following rules as to amending cafeteria plans in light of the guidance therein:

  • A cafeteria plan permitting a change in election upon a change in legal marital status generally is not required to be amended to permit a change in status election with regard to a same-sex spouse in connection with Windsor.

Comment: In the Notice, the IRS has apparently assumed that the cafeteria plan simply refers to "spouse," without defining that term more explicitly. If, however, a plan defined "spouse" as meaning an opposite-sex spouse, then the plan would have to be amended to include same-sex spouses if the plan sponsor wanted same-sex spouses to be treated the same as opposite-sex spouses.

  • To the extent that the cafeteria plan sponsor chooses to permit election changes that were not previously provided for in the plan document, the plan must be amended to permit such election changes on or before the last day of the first plan year beginning on or after Dec. 16, 2013. Such an amendment may be made effective retroactive to the first day of the plan year including Dec. 16, 2013, provided that the plan operates in accordance with the guidance under the Notice.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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