In General. In Notice 2014-1, the IRS provides guidance on the application of the rules under section 125 of the Internal Revenue Code (the “Code”) (relating to cafeteria plans, including health, dependent care or adoption assistance flexible spending arrangements (“FSAs”)), and section 223 of the Code (relating to health savings accounts (“HSAs”)), to the participation by same-sex spouses in FSAs and HSAs following the Supreme Court decision in United States v. Windsor and the issuance of Rev. Rul. 2013-17. The Notice amplifies the previous guidance provided in Rev. Rul. 2013-17. The Notice includes the following rules.
Mid-Year Election Changes. Under the Notice, a cafeteria plan may treat a participant, who was married to a same-sex spouse as of the date of the Windsor decision (June 26, 2013), as if the participant experienced a change in legal marital status for purposes of Treas. Reg. § 1.125-4(c). Accordingly, the plan may permit that participant to revoke an existing election and make a new election in a manner consistent with the change in legal marital status. For purposes of election changes due to the Windsor decision, an election may be accepted by the cafeteria plan if filed at any time during the cafeteria plan year that includes June 26, 2013, or the cafeteria plan year that includes December 16, 2013. Further, for periods between June 26 and December 31, 2013, a cafeteria plan may permit a participant with a same-sex spouse to make a mid-year election change under Treas. Reg. § 1.125-4(f), on the basis that the Windsor decision resulted in a significant change in the cost of health coverage.
Any coverage under the cafeteria plan required by a change in election, which was made by a participant in connection with the Windsor decision between June 26, 2013 and December 16, 2013, must become effective in accordance with plan’s usual procedures when a change in election is made, but no later than by a reasonable period of time after December 16, 2013.
Pre-Tax Salary Reduction Elections. An employer who, before the end of the cafeteria plan year including December 16, 2013, receives notice-through an election change or revised Form W-4- that a participant has a same-sex spouse receiving health coverage through the plan, must do the following. The employer must begin treating the amount that the participant pays for the spousal coverage as a pre-tax salary reduction under the plan, by the date on which a change in legal marital status would be required to be reflected for income tax withholding purposes under Code section 3402, but by no later than a reasonable period of time after December 16, 2013.
In the case of a cafeteria plan participant who elected to pay for the cost of health coverage for the participant on a pre-tax basis through salary reduction under the plan, and also paid for the cost of health coverage for a same-sex spouse under the employer’s health plan on an after-tax basis, the following applies. The participant’s salary reduction election under the cafeteria plan is deemed to include the cost of spousal coverage, so that the amount that the participant pays for spousal coverage is excluded from the gross income and is not subject to federal income or federal employment taxes. This rule applies to the cafeteria plan year including December 16, 2013 and any prior years for which the applicable limitations period under Code section 6511 has not expired.
In general, the Notice allows a cafeteria plan participant to choose to pay for the cost of same-sex spouse coverage on a pre-tax basis through the remaining pay periods in the current cafeteria plan year, by providing notice of the participant’s marital status to the employer, or to continue paying for these benefits on an after-tax basis. In either case, the participant may seek a refund of federal income or federal employment taxes paid on any amounts representing the cost of spousal health coverage that were treated as after-tax and may exclude these amounts from gross income when filing an income tax return for the year.
FSA Reimbursements. A cafeteria plan may permit a participant’s FSA, including a health, dependent care, or adoption assistance FSA, to reimburse covered expenses of the participant’s same-sex spouse or the same-sex spouse’s dependents that were incurred during a period beginning on a date that is no earlier than (a) the beginning of the cafeteria plan year that includes the date of the Windsor decision or (b) the date of marriage, if later. For this purpose, the same-sex spouse may be treated as covered by the FSA, even if the participant had initially elected coverage under a self-only FSA, during that period.
Cafeteria Plan Amendments. A cafeteria plan containing written terms permitting a change in election upon a change in legal marital status generally is not required to be amended to permit a change in status election with regard to a same-sex spouse in connection with the Windsor decision. To the extent that the cafeteria plan sponsor chooses to permit election changes that were not previously provided for in the written plan document, the cafeteria plan must be amended to permit such election changes on or before the last day of the first plan year beginning on or after December 16, 2013. This amendment may be effective retroactively to the first day of the plan year including December 16, 2013, provided that the cafeteria plan operates in accordance with the Notice’s guidance.