IRS Issues Guidance on Application Of Windsor Decision on FSAs, HSAs


Cafeteria plans can permit midyear election changes for plan participants who were legally married to same-sex spouses as of June 26, the date of the U.S. Supreme Court's decision in United States v. Windsor, the Internal Revenue Service said in Notice 2014–1, issued Dec. 16.       

“A cafeteria plan may permit such a 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,” the IRS said in the notice, which mostly took the form of questions and answers addressing the implications of the decision on cafeteria plans and health savings accounts.                    

Plans also are able to permit a midyear election change for participants marrying a same-sex spouse after the Windsor decision, the IRS said.        

The IRS addressed various implications of the high court's June decision related to health and dependent care flexible spending arrangements under tax code Section 125 and HSAs under Section 223.         

On Aug. 29, the IRS released Revenue Ruling 2013-17, which announced that the IRS would recognize all legally married same-sex couples for federal tax purposes regardless of where the couple lived.         

The Supreme Court struck down a key section of the Defense of Marriage Act in June in United States v. Windsor (U.S., No. 12-307, 6/26/13).         

Tax Treatment          

While a change in the tax treatment of a benefit offered under a cafeteria plan “generally does not constitute a significant change in the cost of coverage for purposes” of Treasury Regulations §1.125-4(f), plans may have allowed midyear election changes under those regulations because of the ambiguity created by the Windsor decision, the guidance said.         

Because of this, “for periods between June 26 and December 31, 2013, a cafeteria plan will not be treated as having failed to meet the requirements of section 125 or Treas. Reg. §1.125-4 solely because the plan permitted a participant with a same-sex spouse to make a mid-year election change,” the IRS said.         

The IRS also said that cafeteria plan elections made by participants as a result of the Windsor decision generally take effect “as of the date that any other change in coverage becomes effective for a qualifying benefit that is offered through the cafeteria plan.”        

Pretax Basis          

The IRS also addressed the question of when an employer must begin treating the amount that an employee pays for same-sex spousal health-care coverage under a cafeteria plan as a pretax salary reduction.         

According to the guidance, “an employer that, before the end of the cafeteria plan year including December 16, 2013, receives notice that such a participant is married to the individual receiving health coverage must begin treating the amount that the employee pays for the spousal coverage as a pre-tax salary reduction under the plan no later than the later of (a) the date that a change in legal marital status would be required to be reflected for income tax withholding purposes under section 3402, or (b) a reasonable period of time after December 16, 2013.”         

Also for such plan participants, their salary reduction includes the employee cost of the spousal coverage, even if the amount is reported as taxable income by an employer, the IRS said.         

“Accordingly, the amount that the participant pays for spousal coverage is excluded from the gross income of the participant 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 section 6511 has not expired,” the IRS said.         

For FSA reimbursements, cafeteria plans are allowed to permit a participant's FSA to reimburse covered expenses incurred by a participant's same-sex spouse starting either at the beginning of the cafeteria plan year that includes the date of the Windsor decision, or the date of marriage, whichever is later, the IRS said.

Excerpted from a story that ran in Pension & Benefits Daily (12/16/2013).