As a result of the Windsor decision same gender marriages are recognized for Federal tax purposes if the couple is married in states that recognize same gender marriages regardless of where the couple may be domiciled (see ErisaALERT 2013-04). The IRS has issued Notice 2014-1 providing additional guidance relating to the impact of the Windsor decision on same gender marriages.
IRS Notice 2014-1 is in the form of 10 questions and answers. We will highlight some of the questions.
Cafeteria plan document amendments
A plan document which permits a change in election upon a change in marital status will not require an amendment.
Plan sponsors that wish to amend the plan document to allow election changes due to changes in marital status must be amended on or before the last day of the first plan year beginning on or after December 16, 2013 or December 31, 2014 for calendar year plans. The amendment may be retroactive to the first day of the plan year including December 16, 2013 or January 1, 2013 for calendar year plans.
Areas with immediate impact
Health care, dependent care or adoption assistance FSAs (Q&A 6)
A cafeteria plan may permit a participant’s FSA to reimburse covered expenses for the participant’s same gender spouse or dependents of the same gender spouse. Covered expenses include those incurred no earlier than the beginning of the plan year that includes the date of the Windsor decision (June 26, 2013) or the date of marriage if later. (January 1, 2013 or date of marriage if later for calendar year plans).
HSA and Dependent Care Assistance Contribution Limits (Q&A 7)
The maximum annual contribution limits for married couples applies to same gender spouses who are treated as married for federal tax purposes for the applicable taxable year, including the 2013 tax year. The maximum HSA contribution for a married couple electing family coverage is $6,250 and the maximum dependent care FSA contribution is $5,000.
Example: Same gender couple was married in a state recognizing same gender marriages in 2012. Spouse A elected to make $6,000 in contributions to an HSA. Spouse B made a separate election to make $4,000 in contributions to an HSA. The maximum HSA contribution for a married couple either of whom elects family coverage is $6,250. In this situation, the combined HSA contribution was $10,000 exceeding the annual limit by $3,550. The excess amount plus income attributable to the excess is distributed in 2014 and included in the 2014 income of the spouse who receives the distribution.
Cafeteria plan contributions (Q&A 4 and 5)
A cafeteria plan participant who has been paying for same gender coverage on an after tax basis may choose to continue to pay for the cost of coverage on an after-tax basis for the remaining pay periods in the current cafeteria plan year. Alternatively, the participant may provide notice of the participant’s marital status to the employer to have contributions deducted on a pre-tax basis.
An employer that receives such notice must begin treating the participant contributions as pre-tax salary reductions no later than the date that a change in legal marital status would be required to be reflected for income tax withholding purposes or a reasonable period of time after December 16, 2013.
The participant may provide notice of the participant’s marriage by making an election under the cafeteria plan or by filing a revised Form W-4.
Practically speaking: for calendar year plans it may be impossible to implement any changes for the balance of this year.
The amount the participant pays for spousal coverage is excluded from the gross income of the participant and is not subject to federal income or employment taxes. The participant may seek a refund of any federal or employment taxes that were treated as after tax payments and may exclude these amounts when filing their income tax return.
Plan sponsors that permitted changes before publication of Notice 2014-1 (Q&A 2)
A plan administrator will not be treated as violating the cafeteria plan rules if the plan administrator believed that the change in tax treatment represented significant change in the cost of health coverage and permitted the participant to make a mid-year election.
What plan sponsors should do immediately:
- Review your cafeteria plan document to determine if an amendment is necessary.
- Be prepared to answer employee questions.
Note: all links are active as of the date of issuance of this ErisaALERT.
Disclaimer: This material is for the sole purpose of providing general information and does not under any circumstances constitute legal advice and should not be used as a substitute for legal advice. You should seek the advice of counsel when applying the requirements to your plan. For more information on this ErisaALERT contact us by phone at 610-524-5351 for Mary Andersen, 201-924-7216 for Leanne Fosbre or 215-508-5629 for Theresa Borzelli, Esq. (SFE&G).
