IRS Issues Additional Guidance on Same-Sex Spouse Benefits

Consider the impact of potential Title VII and state law discrimination claims

By Stephen Miller, CEBS Dec 19, 2013

last updated 12/30/2013

In Notice 2014-1, issued Dec. 16, 2013, the Internal Revenue Service clarified how the rules governing cafeteria plans, flexible spending accounts (FSAs) and health spending accounts (HSAs) should be applied in situations involving an employee's same-sex spouse. The notice adds to previous guidance issued in the wake of the U.S. Supreme Court's July 2013 Windsor decision overturning key portions of the federal Defense of Marriage Act (DOMA).

As explained in an alert by law firm Ford & Harrison LLP:

Perhaps the most obvious issue concerning same-sex couples for employers maintaining cafeteria plans has been, "Does the Windsor decision itself constitute a ‘change in status' sufficient to allow a mid-year election change?" In other words, can an employee who already had a same-sex spouse, but who had to be treated as unmarried under the cafeteria plan rules due to the application of DOMA, change his or her election under the plan without waiting until the beginning of the next plan year? Under most plans, the literal answer would have been "no," since the plan would have defined the "change in status" events (or "special enrollment rights" trigger events) as including the employee's "marriage"; here, the employee's marriage did not occur during the year.

However, the regulations governing the change in status rules actually include "events that change an employee's legal marital status."

As a result, even though the employee took no action, overturning DOMA changed the individual's legal marital status under federal law. On that basis, Notice 2014-1 explains that a midyear election change can be made anytime during the plan year that includes either July 26, 2013 (the date of the Windsor decision), or Dec. 16, 2013 (the date of Notice 2014-1).

Among other issues addressed by the notice:

  • FSAs. The notice permits an employee's same-sex spouse (or the spouse's dependents) to be reimbursed from FSAs for expenses incurred on or after the later of (1) the date of marriage or (2) the beginning of the FSA plan year that includes the date of the Windsor decision, regardless of whether the employee had elected coverage that included the spouse during that period.
    "Interestingly, the IRS uses permissive language here (may permit rather than must permit such reimbursement), which is consistent with the fact that neither ERISA nor the tax code requires coverage for spouses in welfare plans," observes an alert from attorneys a Bryan Cave. "That said, in choosing to exclude same-sex spouses from coverage, employers should consider the impact of potential Title VII claims, as well as potential state law discrimination claims (particularly for dependent care and adoption assistance FSAs, where ERISA preemption does not apply)."
  • HSAs. Since federal agencies now recognize marriages of same-sex couples, the family contribution limit to these accounts ($6,450 in 2013) applies to the total contributions the couples made to one or more such accounts, the same way it applies to opposite-sex married couples. "Similarly, the limit on dependent care contributions is $5,000 on a joint return, and would prohibit the couple from contributing more than a combined total of $5,000, even to separate dependent care FSAs," according to the Ford & Harrison alert.

In December 2013 the IRS also updated its FAQs for Individuals of the Same Sex Who Are Married Under State Law, with new questions and answers that clarify how employers administer their plans—including reimbursing an employee for an overpayment of Social Security and Medicare taxes, and income-tax withholding with respect to same-sex-spouse benefits.

"Plan sponsors that already decided to allow mid-year election changes in light of the Windsor decision will be relieved that the guidance confirms that this is permissible," states an advisory from Sibson Consultants. "Plan sponsors that declined to do so due to the uncertainty of the law, or that receive new election change requests in the time remaining in the plan year, will have a reasonable period of time to implement them after Dec. 16, 2013. Finally, plan sponsors should work closely with their accountants if they want to pursue claims for refunds or adjustments of excess employment taxes."

Key Action Items for Employers

An alert from consultancy Towers Watson advises employers to take the following steps to comply with the new IRS guidance:

  • Employers and their counsel need to review IRS Notice 2014-1 to determine its impact on the employer’s particular facts, particularly with respect to existing health plan contribution payment arrangements for health coverage of same-sex spouses, and for FSA and HSA contributions.
  • Unfortunately, the IRS guidance has arrived so late in the 2013 cafeteria plan year that, as a practical matter, it will afford virtually no time for large employers to implement options with respect to the balance of the 2013 cafeteria plan year.
  • Employees may recover overpayments of income and employment taxes attributable to periods (over 2013 and the previous three years) when employees have paid for same-sex spouse coverage on an after-tax basis.
  • Employers that have made an effort to voluntarily communicate the tax law implications of the Windsor decision to employees should consider continuing those efforts with respect to IRS Notice 2014-1.
  • Employers should consider reminding employees in same-sex marriages about the general maximum marital contribution rules for their dependent care FSAs and now for HSAs.

Stephen Miller
, CEBS, is an online editor/manager for SHRM.

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