In its latest addition to guidance concerning the effects of the U.S. Supreme Court's decision in United States v. Windsor, the Internal Revenue Service ("IRS") has issued Notice 2014-1 to address certain issues relating to cafeteria plans, flexible spending accounts ("FSAs"), and health savings accounts ("HSAs").
In Windsor, the Supreme Court held that the federal Defense of Marriage Act ("DOMA"), which precluded recognition of same-sex marriages under federal law, was unconstitutional. The decision left many unanswered questions involving the effect of the decision on employer-provided benefits. With respect to issues under the Internal Revenue Code ("Tax Code"), the IRS has previously issued guidance confirming that same-sex couples will be treated as married for federal tax purposes regardless of where the couple is married. Further, the IRS has also addressed some tax issues under employer medical and retirement plans, including establishing certain procedures for claiming refunds of employment and income taxes, and adjustments for withholding by employers. (See our Epstein Becker Green Client Alerts entitled "The Supreme Court Strikes Down DOMA—Benefit Plan Sponsors Have Much to Consider" and "Treasury and IRS Issue Guidance on DOMA—Many, but Not All, Questions Are Answered"). Although previous guidance was effective as of September 16, 2013, many questions remained, including how to apply the various tax rules to events occurring before the decision and before the September 16, 2013, effective date.
Specifically, Notice 2014-1, which was issued on December 16, 2013, provides that on and after December 16, 2013, employers may allow employees who were in same-sex marriages as of June 26, 2013 (the date of the Windsor decision), or thereafter in 2013, to change their elections under cafeteria plans to reflect their marriages.
The IRS also recognized that, because there was uncertainty as to the availability of a change in marital status election in the wake of the Windsor decision, some plans may have taken the position that such elections have been allowable. Therefore, Notice 2014-1 provides that such elections between June 26, 2013, and December 16, 2013, will not cause a cafeteria plan to violate the applicable tax rules.
Further, the IRS indicated that employers may reimburse out of any funds remaining in a participant's cafeteria plan, including a health, dependent care, or adoption assistance FSA, for same-sex spousal expenses incurred during any portion of the plan year (in which the same-sex couple was married) that includes June 26, 2013.
Employees may file (or may have filed) a new W-4 or cafeteria plan election form indicating that they are married, and employers must begin to treat contributions for the spouse as pre-tax contributions by the later of a reasonable time after December 16, 2013, or when the form is effective.
Since, as noted above, a participant may be deemed to have notified a plan of his or her marital status by filing a revised W-4, even where a new election form has not been filed, employers may need to review the latest W-4 filed by any participant whose same-sex domestic partner (for purposes of the plan) is covered under the employer's health plan.
As a further recognition of the retroactive effect of marital status, employees may also treat the cost of spousal coverage under a cafeteria plan as excludable from income (and not subject to income or employment tax withholding) for the plan year including December 16, 2013 (including the remainder of a such current year even if no W-4 or new election is filed) and for any prior "open" year, even if the employer had reported such amounts as taxable, and employees may seek refunds of any income and employment taxes paid on such amounts.
Notice 2014-1 also states that employers may correct 2013 over- and under-withholdings that occurred because of an employee's marital status (same-sex), but such adjustments may only be made before the end of the year. Employees will still be able to correct over-withholding or under-withholding with their own filings, but if employers wish to help employees by doing an employer filing, they will have to act before December 31, 2013, which, as a practical matter, could not be accomplished by many employers.
Contributions. With respect to HSAs and dependent care FSA contributions, Notice 2014-1 makes clear that the combined limits on contributions apply. If spouses in a same-sex marriage have combined contributions to HSAs and/or dependent care FSAs in excess of the maximum, contributions for either or both spouses may be reduced for the remainder of the year to avoid the over-contribution, or any excess HSA contribution may be distributed from either or both of the HSAs no later than the tax return due date for the spouses. Excess HSA amounts will be subject to excise taxes under Section 4973 of the Tax Code and dependent care contributions will be taxable income.
Plan Amendments. Since Notice 2014-1 was issued mid-December, it may not be practicable for employers to make cafeteria plan amendments by the end of the current year. To address this late date, the IRS is permitting amendments to be made retroactively on or before the last day of the first plan year beginning on or after December 16, 2013. An amendment may be effective retroactively to the first day of the plan year including December 16, 2013, so long as the cafeteria plan operates in accordance with the guidance under Notice 2014-1.
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IRS Circular 230 Disclosure
To ensure compliance with certain IRS requirements, we inform you that any tax advice contained in this publication is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code.