On August 29, 2013, the Internal Revenue Service (IRS) issued widely anticipated guidance regarding the application of the Supreme Court's June 26, 2013 DOMA decision in United States v. Windsor to the taxation and benefits provisions of the Internal Revenue Code. The IRS issued its guidance in the form of Revenue Ruling 2013-17 and two sets of FAQs (one set relating to same-sex spouses and one set relating to domestic partners and individuals in civil unions).
This bulletin summarizes the new IRS guidance about same-sex spouses, and provides an overview of various health care reform provisions requiring employer action this year and next. These Patient Protection and Affordable Care Act requirements are effective even though the IRS is delaying, by one year, enforcement of the law's "employer-shared responsibility" penalties, sometimes referred to as the "play or pay" mandate, and related reporting requirements.
General IRS Principles
The key takeaway from this guidance is the IRS's decision to apply uniform rules for Federal income tax and benefits purposes. Thus, same-sex spouses lawfully married under the law of a state or foreign jurisdiction are lawfully married for Federal tax and benefits purposes regardless of where they reside
The guidance is limited specifically to same-sex spouses. Thus, individuals (same sex or opposite sex) who are recognized under state law as registered domestic partners or members of a civil union are not married for Federal tax or benefits purposes.
In addition, this guidance does not affect a state's determination of whether an individual is married for state income tax or other purposes.
Application to Specific Benefits
Taxation of Medical Coverage: Same-sex spouses are eligible to receive the same tax-free medical coverage as are opposite-sex spouses. This is the case for both the value of any employer-provided premium subsidy, and the value of employee premiums that can be paid on a pre-tax basis under the employer's Section 125 cafeteria plan. Medical reimbursements for same-sex spouses under a Section 125 health care flexible spending account are also tax-free.
Refunds of Income Taxes and FICA Taxes: Employees who previously received imputed income because their employer-provided insurance covered their same-sex spouse (or his/her eligible dependent children) under the medical plan may file for tax refunds for any tax years for which the statute of limitations for refunds has not expired (generally 2010 through 2012).
Employers may make adjustments for excess amounts of income taxes withheld from an employee during 2013 if the employer has repaid or reimbursed the employee for the over-withheld income tax before the end of 2013. Employers may not seek refunds for over-withheld employee income taxes for 2012 and prior years. (Only the employee may seek such refunds).
Employers may file for refunds of Social Security taxes and Medicare taxes (collectively, FICA taxes) paid on amounts that otherwise would have been excluded for FICA tax purposes if the same-sex spouses had previously received the same tax-free coverage accorded to opposite-sex spouses. If the employer cannot locate a former employee after reasonable efforts, or if a located former employee does not give the employer permission to seek a refund on his or her behalf, the employer may seek a refund on only the employer's portion of the FICA taxes. The IRS has promised to issue in the near future a special administrative procedure for employers to file claims for refunds or to make adjustments for excess FICA taxes paid on same-sex spouse benefits.
Qualified Plan Death Benefits: Same-sex spouses have the same automatic survivorship rights under tax qualified retirement plans as do opposite-sex spouses.
- A same-sex spouse must receive a pre-retirement survivor annuity under a defined benefit or money purchase pension plan unless the plan permits the spouse to waive that benefit and the spouse affirmatively waives that benefit.
- A same-sex spouse must be the sole beneficiary under a 401(k), profit sharing or stock bonus plan unless the plan permits that spouse to waive that right and the spouse affirmatively waives that right.
The IRS guidance is generally effective prospectively from September 16, 2013, although due to the retroactive nature of the Windsor decision, individuals and employers may file for retroactive tax refunds provided that the normal statute of limitations relating to refund claims (generally three years) has not lapsed.
Employee benefit plans are required to be in compliance with Revenue Ruling 2013-17 and its related guidance as of September 16, 2013. Again, due to the retroactive nature of the Windsor decision, the IRS has promised future guidance regarding the application of the Windsor decision and Revenue Ruling 2013-17 to employee benefit plan documents and operations prior to September 16, 2013.
The IRS guidance answers many questions prompted by the Windsor decision but leaves others unanswered. What is clear is that employers in all states, and not just those in states that recognize same-sex marriages, now need to review their employee benefit plan terms and participant communications, as well as their payroll and benefit plan administration practices, in light of this change in Federal law.
Although enforcement of the employer shared responsibility provisions has been postponed one year, numerous health care reform changes require employer action this year and next.
What Was Postponed?
The IRS announced two months ago that it was delaying, by one year, enforcement of the employer "shared responsibility" penalties, sometimes referred to as the "play or pay" mandate. The Patient Protection and Affordable Care Act (PPACA) imposes a $2,000 per year per full-time employee penalty if a covered employer fails to offer minimum essential coverage to substantially all full-time employees (and their dependents). Even if an employer offers coverage to substantially all full-time employees, defined generally as those who work an average of at least 30 hours per week, it is still potentially subject to a penalty of $3,000 per year for each full-time employee who is not offered coverage that provides minimum value and satisfies the law's affordability standard. Government enforcement of these penalties, which were scheduled to become effective January 1, 2014, for employer's with calendar year plans, have been postponed by one year.
Also postponed until 2015 are certain penalty-related reporting provisions. One provision requires insurers and self-funded employer plans to report to the IRS information about the health insurance coverage they provide and the individuals to whom they provide that coverage. The other provision requires reporting by employers about the health insurance coverage they offer to their full-time employees. Regulations implementing these reporting requirements are expected to be published shortly.
Changes Effective Later this Year and Next
The announced postponement was welcomed by most employers. Nevertheless, there remain numerous PPACA requirements that become effective later this year and next that demand attention. These include the following:
Notice of Exchange Coverage: A notice concerning Exchange coverage must be distributed by all employers to all current employees by October 1, 2013, and thereafter to new hires within 14 days of their start date. See our bulletin, Employer Notices about PPACA Insurance Exchanges, for additional information.
New SBC Requirements: Summaries of benefits and coverage, also known as SBCs, must be updated to include two additional items: Does the plan provide "minimum essential coverage"? Does the coverage meet the law's "minimum value" actuarial standard? This is effective for plan years beginning on or after January 1, 2014, and therefore must be included with the open enrollment materials distributed this fall for calendar-year plans.
Defining "Full-Time Employees": October 2013 marks the start of the 12-month standard measurement period that most employers electing to utilize the look-back measurement period for variable hour and seasonal employees are expected to use in determining the eligibility of such employees for coverage effective January 1, 2015. Employees who complete at least 1,560 hours of service (an average of at least 30 hours per week) during the 12-month standard measurement period ending in October 2014 will be offered an opportunity to enroll for coverage as part of that fall’s open enrollment process.
Wellness Programs: Final wellness program regulations published in June 2013 are effective for plan years beginning on or after January 1, 2014. These new regulations will require, in certain instances, modifications in the design and operation of existing wellness programs. Also effective beginning in 2014, the maximum incentive amount that may be offered under health-contingent wellness programs is increased to 30 percent of the cost of coverage (or 50 percent in the case of tobacco wellness programs).
Additional Changes: In addition, the following benefit and coverage mandates are effective January 1, 2014, for calendar year plans:
- Eligibility waiting periods may not be longer than 90 days. Guidance issued makes clear that providing for coverage effective the first day of the month following an employee’s completion of 90 days of service is not permitted.
- Essential health benefits may not be subject to annual dollar limits.
- Pre-existing condition exclusions are prohibited for both adults and children (having been prohibited for children under 19 since 2011).
- Coverage of adult children to age 26 is required regardless of the child’s eligibility for other coverage.
Extra Requirements for Non-Grandfathered Plans: Plans which are no longer grandfathered under PPACA are subject to the following extra requirements for plan years beginning on or after January 1, 2014:
- Routine costs for individuals participating in clinical trials must be covered.
- Obesity screening and counseling for adults must be covered.
- Annual out-of-pocket maximums are limited to the maximums applicable to high-deductible health plans. The 2014 limits are $6,350 for individuals and $12,700 for families. An exception authorized by the Department of Labor allows plans with major medical and prescription drug benefits administered by separate claims administrators an additional year to aggregate claims in applying the maximums.
Reinsurance Fee: A reinsurance fee will become payable on a quarterly basis beginning January 15, 2014. The fee is payable by insurers and third-party administrators which, in turn, are expected to pass the cost along to plan sponsors. The fee is set at $63 per covered person for 2014. The fee funds a reinsurance program to help cover costs for high-risk individuals purchasing Exchange coverage.
PCORI Fee: The reinsurance fee is different than another PPACA per covered person fee: the $1 per covered person Patient-Centered Outcomes Research Institute (PCORI) fee. This fee was payable by July 31, 2013 (for 2012) by insurers and by employers of self-funded plans. The PCORI fee increases to $2 per covered person for 2013.
Additional 2013 Changes: Other 2013 changes include W-2 reporting of the value of employer-provided insurance coverage, capping of health care flexible spending account contributions at $2,500 per year, additional preventive services for women without cost sharing (for plans that are not grandfathered), a 0.9 percent increase in the employee share of Medicare taxes on wages exceeding $200,000, and the elimination of the Medicare Part D retiree drug subsidy deduction.