OBTAINING REFUNDS FOR TAXES PAID ON SAME-SEX BENEFITS

The Internal Revenue Service recently provided guidance for employers and employees to make claims for refunds of overpayments of Federal Insurance Contributions Act (FICA) taxes and Federal income tax withholding (employment taxes) with respect to certain benefits provided to same-sex spouses resulting from the Supreme Court decision in United States v. Windsor. Prior to the Windsor ruling, benefits provided to same-sex spouses could not be provided on a pre-tax basis. Because the cost of benefits was considered taxable income, employers were required to withhold FICA and employment taxes on those costs from employee paychecks, and also pay the employer’s own portion of those costs. Now that the law has changed, employers and affected employees may obtain refunds of FICA and employment taxes for some tax years.

In Notice 2013-61, the IRS provides two alternative special administrative procedures. Under the first alternative, employers may use the fourth quarter 2013 Form 941, Employer’s Quarterly Federal Tax Return, to correct overpayments of employment taxes for the first three quarters of 2013. Under the second alternative, employers may file one Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, for the fourth quarter of 2013 to correct these overpayments of FICA taxes for all quarters of 2013.

For overpayments for years prior to 2013, employers can make a claim or adjustment for all four calendar quarters of a calendar year on one Form 941-X filed for the fourth quarter of such year as long as the statute of limitations for the year has not expired and, in the case of adjustments, the period of limitations will not expire within 90 days of filing the adjusted return. The statute of limitations is generally three years from the filing date of a return. Under normal procedures, employers are required to file a Form 941-X for each calendar quarter for which a refund claim or adjustment is made.

The special administrative procedures available in Notice 2013-61 are optional. Employers that prefer to use the regular procedures for correcting employment tax overpayments related to same-sex spouse benefits and remuneration paid to same-sex spouses, instead of the special administrative procedures, may do so. 

While it is important to note that employers are not required to file for a refund of overpayments of FICA or employment taxes, employers are still required to provide a Form W-2c, Corrected Wage and Tax Statement, for affected employees for all affected years. This will allow employees to file for a refund of overpayments of FICA or employment taxes on their own behalf if necessary.

NEW USE IT OR LOSE IT RULE FOR FLEXIBLE SPENDING ACCOUNTS

The IRS recently released guidance allowing a new kind of year-end carryover for health Flexible Spending Accounts. In Notice 2013-71, the IRS modified the use-it-or lose it rule to allow employers to amend their cafeteria plans to allow participants to carry over up to $500 of unused health FSA contributions remaining at the end of the plan year for use in the following year. Amounts carried over may be used to pay or reimburse medical expenses under the health FSA incurred during the entire plan year to which it is carried over. Adopting this new carryover rule does not affect the maximum amount that participants may contribute to the health FSA for the following year. Participants may still contribute up to $2,500 to an FSA. However, plans that permit participants to carry over unused contributions for use during a 2½ month grace period in the following plan year may not also adopt the $500 carryover feature.

Employers that wish to adopt the new carryover rule must adopt an amendment to their cafeteria plan to do so. The Notice generally requires that such an amendment be adopted by the last day of the first plan year from which carryovers will be permitted.  However, a special transition rule permits plans to implement the carryover rule for a plan year beginning in 2013 if the amendment is adopted by the last day of the plan year that begins in 2014.