IRS Issues Year-End Guidance on Pre-Tax Elections Post-Windsor

The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.

By Joy Sellstrom, Esq., and Jennifer A. Kraft,

Seyfarth Shaw LLP, Chicago, IL

As year-end approaches, the Internal Revenue Service (IRS) has
now taken another step in implementing the Supreme Court's decision
in Windsor v. United States  by issuing Notice 2014-1
regarding pre-tax elections.

In Windsor, the Supreme Court struck down the provision
of the Defense of Marriage Act (DOMA) that prohibited the
recognition of same-gender couples as married for purposes of
federal law. Notice 2014-1 provides additional guidance on the
impact of this ruling on pre-tax elections under cafeteria plans,
flexible spending accounts (FSA) and health savings accounts

When the Windsor decision was issued, it was not clear
how the decision would impact employee benefit plans, particularly
retroactively. This guidance confirms that certain mid-year changes
to pre-tax elections under a §125 cafeteria plan are permissible
and provides the following specific guidance:

Mid-Year Election Changes: Participants with Same-Gender
Spouses When Windsor Was Issued

Plan participants who were married to a same-gender spouse on
June 26, 2013 (the date the Windsor decision was issued)
can be treated as if they had a change in legal marital status for
purposes of changing their election under the cafeteria plan
rules.  Participants must make their election change during
the cafeteria plan year that includes either June 25, 2013 or
December 16, 2013 (i.e. in 2013 for calendar year plans). The IRS
noted that a cafeteria plan may not permit a participant with a
same-gender spouse to make a mid-year election change on the basis
that the change resulted in a significant change in the cost of
coverage. Nonetheless, in light of the uncertainty in this area at
the time, the IRS will permit election changes permitted on this
basis between June 26 and December 31, 2013.Effective
Date of Election Change.
 These election changes
generally become effective when other election changes become
effective under the terms of the plan. To permit employers an
opportunity to implement election changes they may have received
but not yet applied, however, the IRS will permit these changes to
be effective within a reasonable time period after December 16,
2013 (if later than the effective date applying normal
procedures).Tax Treatment.  The
Notice provides that a participant may choose to: (1) give notice
to his or her employer and pay for the employee cost of same-gender
spousal coverage on a pre-tax basis for the remaining pay periods
in the current plan year; or (2) continue paying for these benefits
on an after-tax basis. In either case, the participant may seek a
refund of federal income or employment taxes paid on the amounts
representing the cost of spousal coverage and may exclude these
amounts from gross income when filing an income tax return. (This
rule applies to the cafeteria plan year including December 16, 2013
and any open tax years.) If an employer receives notice that the
participant is married by the end of the cafeteria plan year
including December 16, 2013 (December 31, 2013, for calendar year
plans), the employer must begin treating the participant
contributions as pre-tax by the later of: (1) the date of the
marriage; or (2) a reasonable period after December 16, 2013. A
participant may provide notice by filing a revised Form W-4 showing
that the participant is married or by making a pre-tax election to
pay for the employee cost of spousal coverage.

Mid-Year Election Changes: Marriage After Windsor

Plans may permit a participant who married a same-gender spouse
after June 26, 2013, to make a mid-year election change due to a
change in legal marital status pursuant to its normal election
change procedures. See above, however, forEffective
and Tax Treatment
information if the plan had not previously implemented the change
in election.

FSA Reimbursements  

FSAs may permit reimbursement of covered expenses incurred by a
participant's same-gender spouse on or after the first day of the
plan year that includes June 26, 2013 (i.e. January 1, 2013, for
calendar year plans) or, if later, the date of the marriage. Please
note, plan amendments may be necessary to implement this

Dependent Care FSA Limits  

The annual $5,000 limit for a married couple's contribution to a
dependent care FSA applies for the whole 2013 tax year. If this
limit is exceeded, those excess contributions will remain in the
FSA and be available to reimburse allowable claims (or be forfeited
to the extent that allowable claims are not submitted), but will be
treated as taxable.

HSA Limits  

The guidance confirmed that same-gender couples are subject to
the annual deduction contribution limit ($6,450 for 2013 if either
spouse has family HDHP coverage) for the whole year if they are
married on the last day of the tax year - even for 2013. If the
combined HSA contributions by same-gender spouses exceed this
limit, any excess may be distributed from the HSAs of one or both
of the spouses no later than the tax return due date to avoid
excise taxes. This excess distribution amount would be treated as
taxable in the year distributed.

Plan Amendment Deadline Extended. The IRS
has provided that any amendments needed to employer plans to
reflect this guidance may be adopted as late as the last day of the
first plan year beginning on or after December 16, 2013
(December 31, 2014 for calendar year plans) and
may be retroactive back to the first day of the plan year including
December 16, 2013 (January 1, 2013, for calendar year plans).

Although it arrives somewhat late for calendar year plans,
employers who have allowed participants to make election changes
consistent with the Windsor decision will welcome this

For more information, in the Tax Management Portfolios, see
Raish, 397 T.M.
, Cafeteria Plans,  and in Tax
Practice Series, see ¶5940, Cafeteria Plans.

Copyright © 2014 Seyfarth Shaw LLP.


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