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IRS Issues Guidance on the Application of the Windsor/DOMA Decision to Cafeteria Plans, FSAs, and HSAs

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December 2013

The IRS issued Notice 2014-1 which provides guidance on the impact of the U.S. Supreme Court’s recent decision in United States v. Windsor to cafeteria plans, flexible spending arrangements (FSAs), and health savings accounts (HSAs). In Windsor, the Supreme Court struck down the provision of the Defense of Marriage Act (DOMA) which provided that, for purposes of federal law, a marriage could only be between a man and a woman. The Windsor decision effectively resulted in the recognition of same-sex marriage for purposes of federal law. Following Windsor, a number of short but important pieces of guidance have come out from the IRS (with regard to the decision’s general impact under the Internal Revenue Code) and the DOL (with regard to the decision’s general impact under ERISA). We have described those pieces of guidance in previous alerts here and here.

Notice 2014-1 provides some helpful guidance for employers who provide welfare benefits under a cafeteria plan (and that sponsor FSAs and HSAs). Below are the key items from the Notice:

Mid-Year Election Changes. Participants who were in a same-sex marriage as of the date of the Windsor decision (June 26, 2013) can be treated as having a mid-year change in marital status, such that the participant is eligible to make certain mid-year election changes in the employer’s cafeteria plan. The plan may only accept a mid-year election change due to the Windsor decision if the election is filed during the plan year that includes June 26, 2013 or the plan year that includes December 16, 2013 (for calendar year plans, this means the 2013 plan year).

Pre-Tax Contributions for Health Coverage. The Notice provides some helpful clarification to employers on the issue of when to start treating employee contributions for health insurance coverage for a same-sex spouse on a pre-tax basis under a cafeteria plan. The Notice generally provides that participants who are paying the employee cost of health insurance coverage for a same-sex spouse on an after-tax basis must notify the employer that the participant is legally married to the individual receiving spousal coverage. If the employer receives this notice from the employee before the end of the plan year that includes December 16, 2013, the employer must begin treating the contribution as pre-tax no later than the date that a change in marital status would be required for income-tax withholding purposes or a reasonable period of time after December 16, 2013, whichever is later. A revised Form W-4 would, for example, suffice as notice to the employer of the coverage being for a same-sex spouse.

FSA Benefits. The Notice provides that flexible spending arrangements (whether a health FSA, dependent care FSA, or adoption assistance FSA) can reimburse a participant for the covered expenses of the participant’s same-sex spouse or same-sex spouse’s dependent, as long as the expenses were incurred during a time period that begins no earlier than the beginning of the plan year that includes June 26, 2013 or the date of the marriage, whichever is later. And even if the participant had only elected coverage under a self-only FSA for that period, the spouse may be treated as covered by the FSA.

Dependent Care FSA Limits. The joint $5,000 annual limit that applies to a married couple’s contributions to a dependent care FSA also applies to same-sex couples who are treated as married for federal tax purposes in a particular taxable year (i.e., same-sex couples who remain married as of the last day of the taxable year).

HSA Contribution Limits. The joint limit for contributions to an HSA (which is $6,550 for 2014) also applies to same-sex married couples.

Plan Amendments. The Notice clarifies that, unless a cafeteria plan does not permit mid-year election changes for changes in marital status, the plan document does not need to be amended to permit mid-year election changes as a result of the Windsor decision. If a plan sponsor wishes to add mid-year election changes that were not previously allowed under the plan, the plan will need to be amended before the last day of the first plan year that begins on or after December 16, 2013 (i.e., December 31, 2014 for a calendar year plan year).

We expect further guidance from the IRS with respect to the Windsor/DOMA decision’s impact on benefit plans (and retirement plans in particular). In the meantime, in addition to the issues in Notice 2014-1, there are a number of things plan sponsors should be considering with regard to their benefit plans in response to the Windsor decision. These items should be at the top of every plan sponsor’s list in 2014. You may want to consider attending our Annual Employment Law Conference in February where we will discuss all of the relevant Windsor-related employee benefits issues that employers and plan sponsors need to consider. 

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