Finally, some guidance on mid-year cafeteria plan changes that many employers have already permitted in the wake of United States v. Windsor. On December 16, 2013, the Internal Revenue Service (IRS) released Notice 2014-1, which answers questions regarding the proper treatment of cafeteria plan elections, flexible spending account (FSA) expenses, and health savings account (HSA) and dependent care assistance program (DCAP) contribution limits for same-sex married couples.
The IRS offers retroactive relief for mid-year changes to pre-tax premium elections in the wake of the Windsor decision. An election change to reflect the change in legal status for same-sex spouses under federal law is permitted during the plan year including either June 26, 2013 (the date on which the Supreme Court issued Windsor), or December 16, 2013 (the date that the IRS issued the Notice). An election change made between June 26, 2013 and the end of 2013 based on the change of tax treatment for same-sex coverage is also permitted, even though existing regulations would not permit an election change for a change in tax treatment. In either case, employers should use their plan’s existing rules to determine the date on which such change in election becomes effective.
Notice 2014-1 also states that upon receipt of notice that an employee is part of a same-sex married couple, the employer must allow the employee to pay on a pre-tax basis for coverage for the same-sex spouse, even if he or she previously paid for that coverage with after-tax dollars. Employees may provide notice of the marriage in the form of an election change request under the cafeteria plan or a revised Form W-4 indicating that the participant is married. This rule does not prohibit an employee from electing to continue paying for the spouse’s coverage with after-tax dollars for the remainder of the current cafeteria plan year and seeking a tax refund on his or her income tax return.
Health flexible spending accounts may reimburse the expenses of same-sex spouses and their dependents, which were incurred from the start of the plan year that includes June 26, 2013, or the date of the marriage, if later. This retroactive eligibility may apply even if the employee elected self-only reimbursement coverage. For a calendar year plan, for example, a plan may reimburse medical expenses for a couple who were already married at the start of 2013, even if the expenses were incurred before the Windsor decision was issued.
Both HSA and DCAP contributions are capped for households, but prior to Windsor individuals in a same-sex marriage were not treated as a single household for income tax purposes. Under certain circumstances, each same-sex spouse could contribute the household maximum limit independently to an HSA and to a DCAP. Notice 2014-1 applies the HSA and DCAP household limits for same-sex married couples in 2013 and future tax years. Spouses who each elected amounts that together exceed the HSA household limit have two options: (1) to prospectively reduce their contributions to a level below the household maximum—an option likely inapplicable if not already elected prior to the issuance of Notice 2014-1; or (2) to take distributions of excess contributions before the spouses’ filing deadline for the 2013 tax year. Failure to correct before the filing deadline will result in excise taxes under Internal Revenue Section 4973. Excess contributions to a DCAP are includable in taxable income.
If employers choose to permit election changes allowed under Notice 2014-1 but not previously provided for under their cafeteria plan documents, the plans must be amended before the end of the first plan year beginning on or after December 16, 2013. These amendments may be effective retroactive to the start of the plan year that includes December 16, 2013. For a calendar year plan, this means any amendment should be adopted by no later than December 31, 2014, and may apply as of January 1, 2013, so long as the plan is administered consistent with Notice 2014-1.