As discussed in the July 8, 2013 Employee Benefits Update (the “July Update”), and the October 16, 2013 Employee Benefits Update (the “October Update”), the U.S. Supreme Court’s ruling in the Windsor case struck down Section 3 of the Defense of Marriage Act (“DOMA”). Under the Windsor case and subsequent IRS guidance (discussed in the July Update and the October Update), individuals who are in a same-sex marriage that is recognized under applicable state law are considered to be married when applying federal tax statutes and regulations that refer to or involve marital status.
The Internal Revenue Service (“IRS”) recently issued Notice 2014-1 (the “Notice”), which clarifies several outstanding questions for the 2013 tax year regarding elections, contributions and reimbursements under Section 125 flexible benefit plans (“Cafeteria Plans”) and contribution limits to a Health Savings Account (“HSA”) and a Dependent Care Arrangement (“DCA”).
Mid-Year Election Changes
Under the Notice, a Cafeteria Plan 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, and permit such participant to make a new election under the plan. Such an election may be accepted by the plan any time during the Cafeteria Plan year that includes June 26, 2013 (i.e., for a calendar year plan, any time during 2013), as well as the Cafeteria Plan year that includes December 16, 2013.
A plan will not be treated as having failed to meet the requirements of Section 125 to the extent that such elected spousal coverage under the plan becomes effective no later than the latter of (a) the date that coverage under the plan would be added pursuant to the plan’s usual procedures for change in status elections, or (b) a reasonable period of time after December 16, 2013. Elections must otherwise meet the rules and regulations applicable to mid-year election changes under the plan and IRS regulations.
Tax Treatment of Cafeteria Plan Contributions
The Notice provides that, if an employer receives notice from a Cafeteria Plan participant indicating his or her status as married to a same-sex spouse, the employer must begin treating for withholding purposes any amount that such participant pays for the spousal coverage as a pre-tax salary reduction under the plan no later than the latter of (a) the date that a change in legal marital status would be required to be reflected for income tax withholding purposes, or (b) a reasonable period of time after December 16, 2013.
While not addressed in the Notice, for purposes of wage reporting the applicable rules generally require that an employer file a report that it believes is accurate at the time of filing with the IRS. Accordingly, an employer who has been notified of an employee’s same-sex marriage status should report the value of all 2013 employee contributions for such employee’s same–sex spouse as pre-tax contributions on the employee’s 2013 Form W-2.
Similarly, the value of an employer’s 2013 contribution for the health coverage of the employee’s same-sex spouse should be not reported as taxable income on the employee’s Form W-2. Notwithstanding whether an employer withheld employee contributions for same-sex spousal coverage as pre-tax or after-tax contributions, the amount that a participant pays for spousal coverage is excluded from the gross income of such participant and is not subject to federal income or federal unemployment taxes. Although an employee may file an amended return with respect to all open tax years, employers are not required to amend Forms W-2 for years prior to 2013.
Reimbursements From Flexible Spending Accounts
For reimbursements from an employee’s health care or dependent care flexible spending account, the Notice provides that a Cafeteria Plan may permit reimbursement from a participant’s account for covered expenses incurred by the participant’s same-sex spouse during a period beginning on the first day of the Cafeteria Plan year that includes June 26, 2013, or the date of such participant’s marriage, if later.
HSA and DCA Contribution Limits
Under the Notice, a same-sex married couple is subject to the married person joint contribution limits for contributions to an HSA or DCA (which married person joint contribution limits were $6,450 and $5,000 respectively for 2013, compared with the single person contribution limits of $3,250 and $2,500 respectively).
If a couple has made an excess contribution to an HSA for 2013, in order to avoid exceeding the applicable contribution limit such excess contribution may be distributed to the participant prior to the tax return due date for both spouses for 2013. The Notice does not provide a comparable distribution mechanism for excess contributions to a DCA; the excess dependent care contributions should be reported by the taxpayers as taxable compensation.
A Cafeteria Plan which permitted a change in election upon a change in legal marital status generally does not need to be amended in order to permit participants with a same-sex spouse to elect same-sex spouse coverage in connection with the Windsor decision. However, if a plan did not permit a change in election upon a change in legal marital status, such a plan would need to be amended to permit such an election. The deadline for making such an amendment is the last day of the first plan year that begins on or after December 16, 2013.
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this informational piece (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.