IRS Further Clarifies Same-Sex Marriage Issues Affecting Cafeteria Plans

Author: Rena Pirsos, XpertHR Legal Editor

December 23, 2013

The Internal Revenue Service (IRS) has issued Notice 2014-1, which further clarifies the various effects of the US Supreme Court's decision in US v. Windsor and IRS Revenue Ruling 2013-17, regarding same-sex marriage, on cafeteria plans, including flexible spending arrangements (FSAs) and health savings accounts (HSAs). The Notice was issued in question and answer (Q&A) format and provides detailed examples of each scenario covered by the Q&As. The following are the key points employers need to know about Notice 2014-1, including possible required actions before year's end.

Mid-Year Election Changes

Q&A-1. If an employee who participates in an employer's cafeteria plan was legally married to a same-sex spouse as of the date of the Windsor decision (i.e., June 26, 2013) the employee may make a mid-year election as if he or she experienced a change in legal marital status. In other words, the employee is permitted to revoke an existing election and make a new election consistent with the changed marital status. Election changes due to the Windsor decision may be accepted by the cafeteria plan if made at any time during the cafeteria plan year that includes: (i) June 26, 2013; or (ii) December 16, 2013 - the date Notice 2014-1 was issued.

Q&A-2. For periods between June 26 and December 31, 2013, a cafeteria plan will not be considered in violation of the election change regulations of the Internal Revenue Code (IRC) under § 125 solely if an employee with a same-sex spouse was allowed to make a mid-year election because the change in tax treatment of the spousal health coverage was considered a significant change in the cost of health coverage.

Q&A-3. A cafeteria plan election for coverage of a same-sex spouse made due to the Windsor decision generally takes effect as of the date that any other change in coverage would become effective for a qualifying cafeteria plan benefit.

Q&A-4. An employer that, before the end of the cafeteria plan year that includes December 16, 2013, receives notice that an employee who pays for health coverage on a pre-tax basis also pays for same-sex spouse coverage on an after-tax basis, must begin treating the amount the employee pays for the spousal coverage as a pre-tax salary reduction no later than:

  • The date a change in legal marital status would be required to be reflected for income tax withholding purposes under IRC § 3402; or
  • A reasonable period of time after December 16, 2013.

The employee may provide the notice by either: (i) electing spousal coverage via salary reduction; or (ii) by filing a revised Form W-4, Employee's Withholding Allowance Certificate, showing that the employee is married.

Q&A-5. If an employee pays for health coverage via pre-tax salary reduction and for same-sex spousal coverage on an after-tax basis, the employee's salary reduction election is deemed to include the employee's cost of spousal coverage, even if the employer reports the amounts as taxable income and wages to the employee. Accordingly, the amount the employee pays for spousal coverage is excluded from his or her gross income and is not subject to federal income or employment (i.e., Social Security and Medicare) taxes for the cafeteria plan year including December 16, 2013 and any prior years for which the applicable limitations period has not expired (i.e., the current year and the previous three years).

In general, Q&A-4 and Q&A-5 provide that an employee participating in a cafeteria plan may choose to:

  • Pay for same-sex spouse coverage on a pre-tax basis through the remaining pay periods in the current cafeteria plan year by providing notice of his or her marital status to the employer or the plan; or
  • Continue paying for the benefits on an after-tax basis.

In either case, the employee may request a refund of federal income or employment taxes paid on any amounts representing the employee cost of spousal health coverage that were treated as after-tax, and may exclude these amounts from gross income when filing an income tax return for the year.

FSA Reimbursements

Q&A-6. A cafeteria plan may permit a participating employee's FSA, including a health, dependent care or adoption assistance FSA, to reimburse covered expenses of an employee's same-sex spouse 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
  • The date of marriage, if later.

For this purpose, the same-sex spouse may be treated as covered by the FSA during that period.

HSA and Dependent Care FSA Contribution Limits

Q&A-7 - Q&A-9. The maximum annual contribution limits for married couples under HSAs ($6,450) and dependent care FSAs ($5,000) apply to employees with same-sex spouses for 2013. The notice also explains how employers can correct excess contributions that resulted because each spouse in a same-sex marriage elected to contribute to separate HSAs or FSAs and, when combined, they exceeded the limits allowed for a married couple. However, employers must act quickly to make corrections before the end of this year.

Written Plan Amendments

A cafeteria plan document that already permits an election change due to a change in legal marital status will not need to be amended to permit a change-in-status election for a same-sex spouse because of the decision in Windsor. However, plans that did not previously permit such changes in elections but will begin permitting them must be amended by December 31, 2014. For calendar-year plans, the amendment may be effective retroactively to January 1, 2013, if the plan complies with Notice 2014-1.