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Distributed October 4, 2013

Clarification of Same-sex Spouse Guidance Issued by the IRS
In previous compliance communications, we provided summaries of the Supreme Court’s decision ruling the Defense of Marriage Act (DOMA) unconstitutional and the interpretation of the "spouse" definition, which now includes a spouse of the same sex. This Compliance Update focuses on our interpretation of the existing federal rules that apply to welfare benefit plans, and since there are still many unanswered questions, we anticipate additional IRS guidance in the near future.
Please note: This communication is not intended to be nor should it be construed by any third party recipient as legal advice. You should discuss these issues with qualified tax or legal counsel before taking any plan action.
Background
On June 26, 2013, the Supreme Court held in Windsor v. United States that Section 3 of DOMA was unconstitutional, and under federal law, the definition of "spouse" now includes a spouse of the same sex.
However, the impact of the Court’s decision on employee benefit plans remained unclear — especially the impact on welfare benefit plans such as cafeteria plans, FSAs, HRAs, and HSAs. Although it was known after Windsor that "spouse" would be defined by reference to state law, one key issue for plan administrators remained: Would the federal agencies define "spouse" by reference to the laws of the state of celebration or the laws of the state of domicile? This critical question required clarification since the majority of states do not recognize same-sex marriages. In Revenue Ruling 2013-17, the IRS provided the guidance necessary for applying the Court’s decision in Windsor for federal tax purposes.
Some Questions Answered but Others Remain
The recent IRS guidance answers some — but not all — of the nagging questions faced by plan sponsors of welfare plans. IRS clarification includes but is not limited to the following:
  • The terms "spouse" and "husband and wife" include individuals who entered into a legal marriage in any jurisdiction that recognizes same-sex marriage regardless of where they currently live; and
  • Employers and employees can request refunds of taxes on amounts for health coverage provided by the employer to a same-sex spouse that was previously included in income for all open years.
  • The IRS mentions how the decision in Windsor impacts qualified retirement plans, but unfortunately, not much guidance is provided on how the IRS will apply the Windsor decision to welfare benefit plans.
Please note: The September 16, 2013 prospective effective date noted in Revenue Ruling 2013-17 appears to establish a date after which taxpayers must take certain action. For example, same-sex married couples must file with a "married" status if they are filing their federal tax returns after September 16, 2013. However, IRS guidance does not appear to prohibit taxpayers from taking certain action before that. (See below for additional details.)
Frequently Asked Questions
These frequently asked questions provide a summary of what we know to date and what we don’t regarding the effect of the Windsor decision on welfare benefit plans, especially FSAs, HRAs, and HSAs (each of which pose unique issues).
How are "spouse" and "husband and wife" defined for federal tax purposes?
In the Internal Revenue Code, the terms "spouse" and "husband and wife" now include same-sex individuals who are validly married in accordance with the laws of any jurisdiction that recognizes same-sex marriages (i.e., state of celebration). This applies even if the couple resides in a state that does not recognize same-sex marriages, but the definition does not include registered same-sex domestic partners or civil union partners.
If the IRS had adopted an approach that looked to the laws of the state of domicile instead of the state of celebration, the tax status of employer-provided accident and health insurance for same-sex spouses would have varied, depending on where the same-sex couple lived. This would have made plan administration even more difficult if the same-sex couple moved from a state that recognized same-sex marriages to another state that doesn’t (or vice versa).
Does an employer have to offer welfare benefits to same-sex spouses?
Although not specifically addressed in the IRS guidance, nothing in the Windsor decision or federal law requires employers to offer coverage to a same-sex spouse. In many cases, a plan amendment would be required to add coverage for a same-sex spouse if not already offered under the plan.
However, same-sex spouses may become eligible automatically as a result of the Windsor decision — even if an employer doesn’t intend to offer coverage to same-sex spouses. Whether same-sex spouses are automatically eligible will depend on how the plan defines an eligible spouse. For example, a plan provision that defines an eligible spouse in accordance with federal law and does not specifically exclude same-sex spouses would appear to automatically include a same-sex spouse without further amendment or modification to the plan.
Please note: The FSA and HRA template documents CONEXIS provides define "spouse" by reference to federal law; therefore, due to the Windsor decision, the medical care expenses of a same-sex spouse are now eligible for reimbursement automatically.
Is a health plan required to allow an employee to enroll a same-sex spouse if that same-sex spouse is now eligible solely because of the Windsor decision?
We do not believe that the change in federal law prompted by the Windsor decision is a qualifying special enrollment event as defined by HIPAA that would mandate a midyear enrollment by operation of law. The only potential event would be marriage; however, the eligibility is not being triggered in this particular instance by a previous marriage but due to the Supreme Court’s decision in Windsor.
If the plan has adopted the Code Section 125 change in status rules in full, then a plan arguably must allow an election change to enroll the same-sex spouse by virtue of the plan’s terms. (See below for more information on election changes.)
Does federal income and employment tax exclude the cost of employer-provided health coverage for same-sex spouses?
Yes, employer-provided health coverage for an employee’s same-sex spouse is now excluded from income and employment tax. If an employer is already providing health insurance coverage to same-sex spouses, the IRS guidance seems to indicate that the cost of such coverage paid by the employer must be tax-free for federal tax purposes after September 16, 2013. However, it appears employers that previously imputed the value of such coverage in the employee’s income can stop doing so, even before September 16, 2013. (It is our understanding that many already have stopped prior to the IRS guidance.)
For those employers that did provide health coverage to same-sex spouses, the IRS guidance clarifies the following:
  • Employees may request refunds of income taxes paid on employer-provided health insurance coverage that was imputed in income for all "open" years (three years from the date of the return or two years from the date the tax was paid, whichever is later). Such refunds may be requested via an amended Form 1040.
  • If the coverage was otherwise provided through a cafeteria plan, the employee may also request a refund for income taxes paid on all after-tax employee contributions made for the accident and health insurance coverage of the same-sex spouse for all open years.
  • Employers may also request refunds or make adjustments for employment taxes paid in accordance with the instructions to IRS Form 941-X. (The IRS intends to provide a special administrative procedure for requesting employment tax refunds.)
Please note: Under state law, the tax status of such benefits remains unclear. Many states use a taxpayer’s federal gross or adjusted gross income as a basis for state income taxes, which would suggest even states that don’t recognize same-sex marriages would not include the value of employer-provided coverage in income. However, same-sex couples that file "married filing jointly" at the federal level may experience issues when they file at the state level since some states may not allow same sex couples to file married filing jointly, even in states that use federal gross or adjusted income as a basis.
Are eligible medical expenses for a same-sex spouse eligible for reimbursement under a health FSA or HRA?
Although not specifically addressed in the guidance, whether qualifying expenses incurred by a same-sex spouse would be eligible for reimbursement from a health FSA or HRA depends on how the plan defines a spouse.
It is our view that eligible medical expenses incurred by same-sex spouses became automatically eligible for reimbursement by virtue of the Windsor decision if the health FSA or HRA defines "spouse" by reference to federal law and does not specifically exclude same-sex spouses. Otherwise, a plan amendment is required if an employer wants to allow employees to submit expenses incurred by a same-sex spouse.
If same-sex spouses qualify as eligible spouses under the health FSA or HRA since the Windsor decision, would expenses incurred at any time during the year be reimbursable or just those incurred on or after September 16, 2013?
Although unclear, we believe that any expense incurred during the plan year is reimbursable — despite the IRS prospective effective date of September 16, 2013. This applies if a same-sex spouse automatically became an eligible spouse due to the Windsor decision.
On June 26, 2013, the Windsor decision rendered Section 3 of DOMA null and void. If the plan defined "spouse" by reference to federal law and did not specifically exclude same-sex spouses, then same-sex spouses became a covered spouse by operation of law. And even though the IRS definition of "spouse" must be used on or after September 16, 2013, it appears the definition can be used prior to that date.
Please note: Additional guidance from the IRS on this issue is expected.
How does the Windsor decision affect dependent care FSAs?
The IRS guidance doesn’t specifically address dependent care plans; however, we believe that qualifying expenses for child or elder care cease to be eligible for reimbursement on and after September 16, 2013 — by operation of law — if the employee’s same-sex spouse doesn’t work or isn’t looking for work. Likewise, the tax-free benefit under Code Section 129 will be affected by the manner in which the couple files a federal tax return and the same-sex spouse’s earned income.
Per IRS guidance, same-sex couples filing taxes after September 16, 2013 must use a "married" filing status (jointly or married but filing separately). However, it is not clear how this will affect dependent care FSA elections for the 2013 calendar year. Under Code Section 129, married couples filing jointly may not receive more than $5,000 in benefits, and couples who are married but filing tax returns separately may not receive more than $2,500 each. Also unclear is how a same-sex spouse’s earned income for 2013 will impact the benefits received by the employee for 2013.
How does Windsor affect HSAs?
Although not specifically addressed in the IRS guidance, qualifying medical expenses incurred by a same-sex spouse would be eligible for a tax-free reimbursement through an HSA. Since HSA rules only require that the otherwise unreimbursed expense be incurred after the HSA was established, an eligible unreimbursed expense of a same-sex spouse incurred at any time after the HSA was established is arguably a qualifying expense — even if incurred prior to the Windsor decision. Yet, this is not entirely clear.
In addition, HSA rules limit the contributions made by each spouse to his or her respective HSA if one or both have qualifying family coverage. Same-sex couples will also be subject to this rule.
Please note: It is unclear how the married couple contribution rule will affect contributions made by married same-sex couples in 2013. As noted above, same-sex spouses must file using a "married" status if filing after September 16, 2013.
Can an employee with a same-sex spouse change his or her cafeteria plan election?
While the IRS did not provide guidance, we believe the Windsor decision will affect cafeteria plan elections in the following ways:
  • If same-sex spouses were covered prior to the Windsor decision, but coverage was offered on an after-tax basis, it would appear that an election change to pay for such coverage with pre-tax dollars must be allowed if the employer has adopted the change in status rules. The Windsor decision caused an increase in the number of dependents who may benefit from an employer plan, which includes the cafeteria plan.
  • If same-sex spouses are now eligible solely by virtue of the Windsor decision, and an amendment is not made to exclude them, then under the Code Section 125 rules, employees should be able to change their coverage to add a same-sex spouse if the plan has adopted the change in status rules.
  • Likewise, an employee enrolled in a health FSA that covers same-sex spouses since the Windsor decision should be able to increase his or her health FSA election due to increased dependents eligible for the plan.
  • If same-sex spouses are specifically excluded under the plan, no election changes would be permitted.
Please note: Most plans require employee notification of a change in status event within 30 days. However, if same-sex spouses became eligible under a health FSA or HRA because of the Windsor decision, the date of the "event" was arguably the date of the Windsor decision, June 26, 2013. If so, the election period has expired. While there is no clear answer how to address this, some might argue that the IRS intends for employers to treat September 16, 2013 as the event date, but that isn’t clear. Most likely, the IRS will address this issue in future guidance, but in the meantime, employers may choose to amend the plan to open up the election period.
How do the Windsor decision and the recent IRS guidance impact COBRA?
COBRA is not addressed in the IRS guidance; however, as a result of Windsor, a same-sex spouse covered by a group health plan is now a qualified beneficiary entitled to COBRA. Plan changes are required if group health coverage is currently offered to same-sex spouses but COBRA continuation coverage is not. Plus, if continuation coverage that does not otherwise comply with COBRA is not offered, plan changes are required.
Please note: It isn’t clear whether all qualifying events after Windsor must be recognized or whether plans can recognize qualifying events that occur after September 16, 2013. We expect future guidance to address this.
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