Good News Tax Guidance for Post-Windsor Era of Cafeteria Plans, FSAs and HSAs

Tom Breitenbach

The IRS issued Notice 2014-1 this past Monday to basically confirm what most practitioners assumed would be the favorable tax treatment for same-sex spouses under cafeteria plans, flex spending account plans and health savings accounts. The first-numbered Notice for our New Year is in easy-to-read Q&A format. It’s short, too, with only 10 Q&A’s.

No surprises here for the tax treatment of same-sex spouses, placing them on equal footing with opposite-sex spouses and consistent with previous guidance issued in Rev. Rul 2013-17. It is now confirmed that cafeteria plan elections may be changed due to change in legal marital status for plan participants who were lawfully married to a same-sex spouse as of the date of the Windsor decision (June 26, 2013). These mid-year elections changes continue to be subject to the consistency rules under the regulations. The IRS clarified that marriage to a same-sex spouse is not considered an event allowing a mid-year change on the basis of a significant cost change in coverage (but this reason for a mid-year election change is not needed since the marriage itself qualifies). However, for the current plan year, the IRS will not cry “foul” for any cafeteria plan that permitted a participant with a same-sex spouse to make a mid-year election change as a result of wrongfully interpreting that the change in tax treatment of spousal health coverage arising from the Windsor decision resulted in a significant change in the cost of health coverage. Same result as using the permitted “change in legal marital status” mid-year change rule. So no harm, no foul.

An employee who paid for health coverage on an after-tax basis for a same-sex spouse should have that amount excluded from gross income and not subject to federal income or federal employment taxes. This rule applies for both the current year and any years for which the applicable statute of limitations has not expired. Employers who receive notice of a participant’s same-sex marriage should switch salary deferrals to pre-tax within a reasonable time. Notice from a participant includes a new salary reduction election (as permitted due to a change in legal marital status as explained above) or by filing a revised Form W-4 indicating married-status. While this guidance is fairly late for 2014 open enrollment periods, it seems that most employers’ forms for 2014 open enrollments already honored elections as pre-tax for legally married same-sex spouses on a going-forward basis. If not, then changes should be allowed.

Of course, FSA benefits including health and dependent care expenses may be used to reimburse qualifying expenses of same-sex spouses and dependents, including for the period retroactive to January 1, 2013 for calendar-year plans.

With the good news comes the bad news, but again not a surprise. Because same-sex spouses are subject to the joint deduction limit for contributions to a HSA ($6,450 for family coverage for 2013), any excess contributions must be distributed to one or both of the spouses no later than the tax return due date for the spouses. The limit may also be satisfied by reducing future contributions, but issuing this guidance two weeks before the end of the year does little good for 2013.

For calendar-year plans, amendments are not required before December 31, 2014 – yet another addition for your list of document revisions.