In Notice 2014-1, the IRS has provided additional guidance for cafeteria plans (including health and dependent care flexible spending accounts) and Health Savings Accounts on compliance with the changes to treatment of same-sex married couples following the Supreme Court’s Windsor decision. The guidance in Notice 2014-1, issued on December 16, 2013, expands on previous IRS guidance issued in Revenue Ruling 2013-17, which we discussed in our client advisory available here. The bullet points below summarize the key guidance points described in the Notice and offer some practical insight for employers in implementing the guidance.
Windsor’s Effect on Cafeteria Plan Administration
- Cafeteria plan participants who were legally married on June 26, 2013—the date of the Windsor decision—may make change-in-status elections based on a change in marital status (if the plan permits these type of changes). These changes may be made any time during the cafeteria plan year that includes June 26, 2013 or the cafeteria plan year that includes December 16, 2013. NOTE: This guidance is likely more useful for non-calendar year plans and will be of limited utility for calendar year plans at this point in the year.
- Same-sex couples married after June 26, 2013 should be permitted to change their cafeteria plan elections as the plan permits for other marriages.
- Changes in coverage as a result of Windsor should be allowed as changes in marital status rather than significant changes in the cost of coverage. However, cafeteria plans that allowed same-sex spouses to make mid-year election changes for periods between June 26, 2013 and December 31, 2013 based on a significant change in the cost of coverage will not be considered out of compliance with cafeteria plan rules.
- Cafeteria plans that have received election change requests from married same-sex participants and have been waiting to approve those requests should approve them. Election changes as a result of these requests should take effect no later than a reasonable period of time after December 16, 2013 (or when such changes would take effect under the plan’s usual procedures for change in status elections, if later).
- Employers must begin to treat amounts paid for coverage elected by a same-sex spouse under a cafeteria plan as pre-tax salary reductions no later than a reasonable period of time after December 16, 2013 (or the date such amounts would otherwise be required to be reflected as pre-tax for income tax withholding purposes, if later).
- Cafeteria plans that already permit change-in-status elections as a result of changes in marital status do not have to be amended to permit changes in status as a result of same-sex marriages.
- Cafeteria plans may permit FSA reimbursements for eligible expenses incurred by same-sex spouses and those spouse’s dependents beginning any time during the plan year that includes June 26, 2013, even if the participant elected coverage under a self-only FSA for the 2013 plan year.
Windsor’s Effect on Contribution Limits for HSAs and Dependent Care Assistance Programs (DCAPs)
Starting with the 2013 plan year, same-sex married couples are subject to the same maximum annual deductible HSA contribution limits that apply to any other married couple. Same-sex spouses that each, separately had elected family coverage and made HSA contributions that, when combined, total more than the 2013 HSA contribution limit ($6,450 for 2013) will need to receive a timely distribution of the excess to avoid excise taxes. Beginning in 2013, same-sex married couples are subject to the same DCAP exclusion limits as any other married couple ($5,000 for 2013, if married filing jointly; $2,500 if married filing separately). Excess contributions for the 2013 plan year must be included in the spouses’ gross income.
Cafeteria plans that have been waiting to approve change-in-status requests from participants married to a same-sex spouse should approve those requests per the plan’s normal procedures in a timely manner. Cafeteria plans should begin treating benefits elected for a same-sex spouse as pre-tax now, if it hasn’t already been doing so. Employers and plan record keepers will need to monitor contributions made to HSAs and DCAPs for the 2013 plan year and ensure excess amounts are timely distributed or included in an employee’s income, as appropriate. Employers may want to inform employees of this new guidance and remind them to notify human resources if they are married to a same-sex spouse.