The IRS on Dec. 16 issued Notice 2014-1 to provide guidance on the application of the cafeteria plan rules under Section 125 (including health and dependent care flexible spending arrangements (FSAs)) and health savings accounts (HSAs) under Section 223, and how those rules relate to participation by same-sex spouses following the Supreme Court's decision in United States v. Windsor, 570 U.S.__ (2013).
In Windsor, the Supreme Court struck down Article III of the Defense of Marriage Act, which defined marriage for all purposes of federal law (including tax) as being between people of the opposite sex. Following the Supreme Court's ruling, the IRS issued Rev. Rul. 2013-17, which stated that for federal tax purposes, a couple is considered married if the two people are married under the laws of a state or a foreign jurisdiction, thus treating same-sex spouses married under state or foreign law as married for federal tax purposes. The Windsor decision was handed down on June 26, 2013, and raised concerns about what midyear changes were required for health and welfare plans.
The notice states that a cafeteria plan may treat a participant who was married to a same-sex spouse on the date of the Windsor decision as experiencing a change in legal marital status. Accordingly, the plan could permit the participant to revoke an existing election and make a new election for health care coverage. A cafeteria plan may also permit a participant who married a same-sex spouse after June 26, 2013, to make a midyear election change because of a change in marital status. The notice provides additional guidance regarding health care coverage elections under a cafeteria plan.
Notice 2014-1 also provides that health, dependent care or adoption assistance FSAs can reimburse covered expenses of a participant's same-sex spouse or the same-sex spouse's dependents during the period beginning on a date that is no earlier than (1) the beginning of the cafeteria plan year that includes June 26, 2013 or (2) the date of marriage, if later.
For a calendar year cafeteria plan, medical expenses incurred in 2013 may be reimbursed by a health FSA through March 15, 2014, if the plan includes a run-out period. This means the plan may permit a reimbursement on or before March 15, 2014, of medical expenses incurred during 2013 by the participant's same-sex spouse and the same-sex spouse's dependents.
A health FSA can include a grace period of 2½ months following the end of the cafeteria plan year during which the employee can be reimbursed with funds contributed to the FSA during the previous year for medical expenses incurred during the grace period. Thus, a cafeteria plan that includes a grace period may permit the health FSA to reimburse medical expenses incurred during the grace period by the participant's same-sex spouse and the same-sex spouse's dependents.
Notice 2014-1 also addresses the contribution limits that apply to HSAs and dependent care FSAs. A single individual was able to contribute up to $3,250 to an HSA in 2013, while married individuals could contribute, in aggregate, up to $6,450. If both same-sex spouses elected to contribute the maximum amount to their HSAs in 2013, they would contribute, in aggregate, $6,500, which would exceed the limit for a married couple. The notice provides that a contribution exceeding the limit may be distributed to the spouse on or before the due date of the spouses' tax return without incurring a penalty.
Any excess contribution remaining in the HSAs after the tax return due date will be subject to the excise tax under Section 4973. The annual limit on contributions to a dependent care FSA is $5,000, and this limit applies to individuals and married couples. If both same-sex spouses elected to contribute the maximum $5,000 to their respective dependent care FSAs, in aggregate, their contributions would exceed the $5,000 limit. The notice provides that to the extent the same-sex spouses' aggregate contribution to a dependent care FSA exceeds $5,000, the excess can be included in the spouses' gross income.
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