Distributed December 26, 2013
Application of Same-sex Spouse Rules for Cafeteria Plans, FSAs, and HSAs
On June 26, 2013, the Supreme Court held in Windsor v. United States that Section 3 of the Defense of Marriage Act (DOMA) was unconstitutional, and under federal law, the definition of "spouse" now includes a spouse of the same sex. In September 2013, the IRS issued Revenue Ruling 2013-17, which defined a "spouse" and stated legally married same-sex spouses would be treated as married for tax purposes, regardless of the couples’ state or residence. The regulations also noted that the recognition of each couple’s marriage is retroactive; however, questions related to employer-sponsored plans and certain other benefits remained.
New Guidance Issued
Recently, the IRS released Notice 2014-1, which provides additional guidance and clarifications for the application of rules related to cafeteria plans, flexible spending accounts (FSAs), and health savings accounts (HSAs). The Notice also includes informative questions and answers as well as extensive examples that show the application of the new regulations.
Employers may allow mid-year election changes under cafeteria plans so plan participants who are legally married to same-sex spouses can cancel an existing election or make a new election, whichever is consistent with the status change event. (Please refer to the guidance for additional details.) This allows dependent care FSA participants to amend election amounts to keep from exceeding maximum annual limits and paying additional taxes. It also allows spouses who did not have health insurance to obtain coverage under the employee’s plan. Key details are listed below.
Cafeteria Plans
•	A cafeteria plan may treat a same-sex marriage as a change in legal marital status. If a same-sex couple was already "married" (as defined in Notice 2013-71) on June 26, 2013 (the date of the Windsor decision), the cafeteria plan may treat the Windsor decision as a change in legal marital status. This also applies to same-sex spouses married after June 26, 2013.
•	This only affects plans that actually cover same sex spouses. Nothing in this guidance requires a plan to cover same-sex spouses who are not otherwise eligible under the plan (e.g., a plan that limits coverage to opposite-sex spouses).
•	Employers may make the following mid-year health plan changes (to the extent otherwise permitted under your cafeteria plan):
	–	Enroll employee
	–	Enroll employee and same-sex spouse
	–	Enroll same-sex spouse if employee already enrolled in the group health plan
	–	Allow employee to drop coverage if employee becomes covered under same-sex spouse’s health plan
•	Elections made between June 26 and December 16, 2013 become effective no later than:
	–	The date the election change would become effective under the plan when the usual procedures are followed; or
	–	A reasonable time frame that follows December 16, 2013.
Please note: Employers that have already allowed their employees to make mid-year elections, based on their interpretation of previous guidance, will not be penalized nor will their plans lose tax-favored status.
Flexible Spending Accounts
•	Reimbursements are permitted for eligible medical and dependent care expenses incurred by or for a same-sex spouse anytime during the plan year that includes June 26, 2013.
•	Employee may enroll in the FSA or increase their elections. They may also decrease elections if they obtain coverage under spouse’s health plan.
Please note: The guidance does not address the treatment of expenses incurred before employees increase their elections in accordance with Notice 2014-1.
Dependent Care FSA Contribution Limits
•	If a same-sex couple is treated as married in 2013, then the maximum annual limit applies.
	–	Married and file taxes jointly: $5,000 annual limit
	–	Married but file taxes separately: $2,500 annual limit
•	As noted previously, same-sex spouses may request election increases or drop their FSAs altogether due to change in needs and/or eligibility.
•	Election decreases may be made before the end of the year. If combined dependent care FSA contributions exceed the maximum annual limit, the excess will be included in taxable income.
Health Savings Accounts
•	To avoid tax penalties, same-sex spouses who have HSAs may also change their contribution amounts by April 15, 2014 to avoid exceeding the maximum limit of $6,450 in 2013.
•	HSA account holders may use existing account funds toward eligible expenses incurred by a same-sex spouse.
•	Employees may need to act quickly in order to take advantage of this relief.
Immediate Action Required For Employers
Unfortunately, due to the late release of this Notice, employers have little time to inform employees of the need to take action before the end of the year. However, many of the Notice provisions will affect the amount of reportable income on employees’ 2013 Forms W-2, and employers should inform individuals who prepare these forms of the new guidance.
Since Notice 2014-1 has been issued late in December 2013, an employer with a calendar-year plan may not have time to amend their plan documents before the 2013 plan year ends. To allow additional time to update plan documents, retroactive amendments are permitted on or before the last day of the plan year that includes the date the Notice was issued, which is December 16, 2013. This retroactive provision is permissible only if the employer’s plan follows all Notice regulations.
Tax Treatment of Salary Reductions
If informed of a same-sex marriage before the end of the plan year that includes December 16, 2013, the employer must treat amounts paid for spousal health coverage as pre-tax salary reductions. The guidance also provides two options for employers that have collected after-tax health insurance premiums for same-sex spouses under a domestic partner policy during the plan year that included December 16, 2013. Such employers may either (1) adjust withholding during the remainder of the plan year, or (2) continue to treat the spouses’ premiums as after-tax. If the employer chooses the second option, an employee will not be taxed on the value of the spouse’s coverage, and the withheld funds can be applied to taxes the employee owes or funds may be returned to the employee by the IRS in a tax refund.
877.CONEXIS   |  WWW.CONEXIS.COM
© 2013 CONEXIS Benefits Administrators, LP. All Rights Reserved. CONEXIS is a Word & Brown Company.
CONEXIS does not offer legal, accounting, or other professional advice. If you need additional guidance, please contact your attorney or tax advisor.
CONEXIS uses reasonable efforts to ensure that the information provided in this email is accurate as of the date of distribution. However, information of this nature can change at any time. You should confirm the accuracy of any such information prior to taking any action.
View our Email Privacy Policy