In June 2013, the Supreme Court held unconstitutional a federal law requiring only opposite-sex marriages to be recognized for federal law purposes. The Internal Revenue Service ("IRS") issued initial guidance in September 2013 stating that for federal tax purposes, the IRS would recognize all legally married same-sex couples, and issued additional guidance in mid-December 2013 relating specifically to cafeteria plans, flexible spending accounts ("FSAs"), and health savings accounts ("HSAs"). Highlights of the new guidance include the Supreme Court decision's impact on mid-year election changes under cafeteria plans, permitted FSA reimbursements, and contribution limits for HSAs and dependent care assistance programs.
An employee may purchase health coverage for himself or herself and his or her spouse and dependents through an employer's cafeteria (or Section 125) plan. However, prior to the Supreme Court decision, an employee could not purchase such coverage for his or her same-sex spouse on a pre-tax basis. Similarly, because the federal government did not recognize same-sex marriages, an employee and his or her same-sex spouse were not subject to the limitations that applied to opposite-sex married couples under a HSA or a dependent care FSA. The latest IRS guidance explains how employers can implement the Supreme Court decision with respect to cafeteria plans, FSAs and HSAs:
Mid-Year Cafeteria Plan Election Changes
- If an employee was in a same-sex marriage as of June 26, 2013 (the date of the Supreme Court decision), or if an employee gets married to a same-sex spouse after June 26, 2013, a cafeteria plan may permit the employee to make a mid-year change to his or her cafeteria plan election during the cafeteria plan year that includes December 16, 2013, and begin paying for a same-sex spouse's coverage on a pre-tax basis.
- A cafeteria plan is not required to allow employees to make mid-year election changes. However, most cafeteria plans do permit such changes for life events such as marriage or divorce. If a cafeteria plan does not permit such changes and the employer wants to allow them, the cafeteria plan will need to be amended.
- A mid-year election change to add a same-sex spouse must satisfy the general rules that apply to other mid-year election changes, including the requirement that the election change be consistent with the event giving rise to it (i.e., an employee who is adding a same-sex spouse could not use the opportunity to elect to decrease his monthly FSA contributions).
- Mid-year election changes to add a same-sex spouse generally take effect as of the same date that any other change in coverage under the cafeteria plan would become effective.
- The IRS clarifies that if an employee elected to add a same-sex spouse between June 26, 2013 and December 16, 2013, the cafeteria plan must reflect that change in status before the later of (i) the date required by the cafeteria plan's usual procedures for changes in status, and (ii) a "reasonable time" after December 16, 2013.
- An employee who paid for same-sex spouse coverage on an after-tax basis for all or any portion of 2013 (and/or for prior open tax years) may request a refund of federal income or employment taxes paid on the cost of such coverage during such period.
- Employers may make claims for refund of related overpayments of FICA taxes for 2013 and prior open tax years using special administrative procedures issued by the IRS in late October 2013.
- Employers may permit an employee's FSA (including a health, dependent care or adoption assistance FSA) to reimburse covered expenses that relate to the employee's same-sex spouse or such same-sex spouse's dependents, so long as those expenses were incurred no earlier than (1) the beginning of the FSA plan year that includes June 26, 2013, or (2) the date of the employee's marriage (if later).
- Reimbursements may be made for such expenses even if they were incurred prior to June 26, 2013, so long as the expenses were incurred during the FSA year that includes June 26, 2013, and the employee represents that he or she was legally married to the spouse on the date the expenses were incurred.
HSA and Dependent Care Contribution Limits
- Same-sex couples who are married as of December 31, 2013 are subject to the same annual contribution limits as opposite-sex married couples for HSAs ($6,450 for the 2013 taxable year) and Dependent Care FSAs ($5,000 for the 2013 taxable year).
- If a same-sex couple's combined HSA contributions for 2013 exceed $6,450, the excess may be distributed from the HSA of one or both spouses, no later than the deadline (including extensions) for the spouse to file a federal tax return (generally April 15, unless an extension is filed). Any excess contributions that are so distributed will be subject to income tax, but not excise taxes.
- If the same-sex couple's combined contributions to dependent care FSAs for 2013 exceed $5,000, the couple must include the amount of the excess contributions in their 2013 taxable income.
Cafeteria Plan Amendments
- Cafeteria plan amendments are not necessary unless an employer wants to permit mid-year election changes that are not already permitted by the plan document.
- If a cafeteria plan document already permits a mid-year election change based on a change in legal marital status, the plan will not generally need to be amended to allow a mid-year election to add a same-sex spouse.
- Any amendment to add a mid-year election for a change in legal marital status for 2013 must be made no later than the end of the plan year that begins on or after December 16, 2013 (e.g., by December 31, 2014, for calendar-year plans). The amendment may be made retroactive to the first day of the plan year including December 16, 2013 (e.g., January 1, 2013, for calendar-year plans), so long as the cafeteria plan is operated in accordance with the IRS guidance.