IRS Issues Guidance On Post-DOMA Benefits Issues

The Internal Revenue Service has updated its online frequently asked questions (FAQs) on the impact on employee benefits of the Supreme Court’s decision in Windsor. In that case, the Supreme Court struck down Section 3 of the Defense of Marriage Act of 1993 (DOMA).

The IRS also has issued Notice 2014-1, which amplifies the guidance provided by Rev. Rul. 2013-17, on the application of the rules under Sec. 125 relating to cafeteria plans, including health and dependent care flexible spending arrangements (FSAs), and Sec. 223 relating to health savings accounts (HSAs), to the participation by same-sex spouses in certain employee benefit plans. The guidance is in question-and-answer format and addresses such issues as midyear election changes, FSA reimbursements, and contribution limits for HSAs and dependent care assistance programs. The notice is effective as of Dec. 16, 2013.

Place of celebration approach. After Windsor, the IRS announced that same-sex couples, legally married in jurisdictions that recognize their marriages, will be treated as married for all federal tax purposes. The IRS also announced that for tax year 2013 and going forward, same-sex spouses generally must file using a married filing separately or jointly filing status. Additionally, the IRS issued Notice 2013-61, describing two administrative procedures for employers to correct overpayment of employment taxes.

Note that as long as a couple is married in a jurisdiction that recognizes same-sex marriage, the IRS will recognize their marriage even if they relocate to a jurisdiction that does not recognize same-sex marriage.

Tax treatment of benefits. Because of Section 3 of DOMA, employers that allowed an employee to add his or her same-sex spouse to their health plan needed to impute income to the employee for federal income tax purposes equal to the fair market value of health coverage provided to the same-sex spouse. However, this did not apply if the same-sex spouse qualified as a dependent.

In its updated FAQs, the IRS explained that an employee should seek a refund of Social Security and Medicare taxes from his or her employer first. However, if the employer indicates an intention not to file a claim or adjust the overpaid Social Security and Medicare taxes, the employee may claim a refund of any overpayment of employee Social Security and Medicare taxes by filing Form 843, Claim for Refund and Request for Abatement.

The IRS also explained that an employer using the first special administrative procedure under Notice 2013-61does not need to obtain a written statement from its employee with respect to the 2013 overpayments. However, an employer that uses the second special administrative procedure under Notice 2013-61must obtain a written statement from each affected employee. The updated FAQs also discuss home employment situations and joint ventures.

Midyear election changes. Notice 2014-1 indicates that 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 for purposes of the election change rules. Accordingly, a cafeteria plan may permit such a participant to revoke an existing election and make a new election in a manner consistent with the change in legal marital status. For purposes of election changes due to the Windsor decision, an election may be accepted by the cafeteria plan if filed at any time during the cafeteria plan year that includes June 26, 2013, or the cafeteria plan that includes Dec. 16, 2013.

A change in the tax treatment of a benefit offered under a cafeteria plan generally does not constitute a significant change in the cost of coverage, however. Given the uncertainty created by the Windsor decision, cafeteria plans may have permitted mid-year election changes based on a change in the cost of coverage prior to the publication of Notice 2014-1. As such, for periods between June 26 and Dec. 31, 2013, a cafeteria plan will not be treated as having failed to meet the election change rules solely because the plan permitted a participant with a same-sex spouse to make a midyear election change on the basis of cost 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.

FSA reimbursements. A cafeteria plan may permit a participant’s FSA, including a health, dependent care, or adoption assistance FSA, to reimburse covered expenses incurred by the participant’s same-sex spouse (or the same-sex spouse’s dependent) beginning on a date that is no earlier than (1) the beginning of the cafeteria plan year including the date of the Windsor decision; or (2) the date of marriage, if later.

For this purpose, the same-sex spouse may be treated as covered by the FSA (even if the participant had initially elected coverage under a self-only FSA) during that period. 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. A same-sex married couple is subject to the joint deduction limit for contributions to an HSA, according to Notice 2014-1. The maximum annual deductible contribution to one or more HSAs for a married couple either of whom elects family coverage under a high deductible plan is $6,450 for the 2013 taxable year.

In addition, a same-sex couple is subject to the exclusion limit for contributions to a dependent care FSA. The maximum annual contribution to one or more dependent FSAs for a married couple is $5,000.

Written plan amendment. According to Notice 2014-1, a cafeteria plan containing written terms 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 the Windsor decision.

To the extent that the cafeteria plan sponsor chooses to permit election changes that were not previously provided for in the written plan document, the cafeteria 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 effective retroactively to the first day of the plan year including Dec. 16, 2013, provided that the cafeteria plan operates in accordance with the guidance under Notice 2014-1.