IRS Notice 2014-01, issued December 16, 2013, provides guidance for plan sponsors of Code Section 125 cafeteria plans and Code Section 223 health savings accounts (“HSA”) regarding plan elections made by same-sex spouses. Prior to the Supreme Court’s decision in United States v. Windsor, the Defense of Marriage Act (“DOMA”) defined marriage as a union between a man and a woman. Thus, employees with same-sex spouses were unable to make cafeteria plan and HSA elections based on their marriages. Post Windsor, federal law now recognizes marriages between same-sex partners entered into in states that legally recognize such unions.
Pursuant to the Notice, if a cafeteria plan participant is married to a same-sex spouse on or after the date of the Windsor decision (June 26, 2013), the participant may now make a mid-year election change on the basis of a change in legal marital status. Thus, a cafeteria plan may permit a participant to revoke an existing election (which excluded the same-sex spouse from coverage) and make a new election in a manner consistent with the change in legal marital status. If an employer receives notice that a participant is legally married to a same-sex spouse prior to the end of the cafeteria plan year including December 16, 2013, the employer must begin treating the amount the employee pays for the spousal coverage as a pre-tax salary reduction (rather than a post-tax payment) no later than (i) the date the change in legal marital status would be required to be reflected for income tax withholding purposes, or (ii) a reasonable period of time after December 16, 2013. The guidance also provides that a cafeteria plan may reimburse covered expenses of the participant’s same-sex spouse (or his/her dependents) that were incurred during the period beginning on the earlier of (i) the beginning of the cafeteria plan year that includes the date of the Windsor decision, or (ii) the date of the marriage if later. This rule applies to dependent care accounts or adoption assistance programs.
Election changes made pursuant to Notice 2014-01 must be formally amended into the cafeteria plan document on or before the last day of the first plan year beginning on or after December 16, 2013. For a calendar year plan that date is December 31, 2014. The amendment may be retroactively effective to the first day of the plan year including December 16, 2013 provided the cafeteria plan operates in accordance with the guidance under the Notice.
For HSA plans, Notice 2014-01 provides that contribution limits for HSA accounts must be calculated under the same rules used for married couples. Thus, if the spouses in a recognized same-sex marriage previously elected to make contributions to separate HSA’s and the combination of their HSA contributions exceeds the applicable HSA contribution limit for a married couple, the excess can be corrected by reducing one or both of the spouses remaining contributions for the tax year to avoid exceeding the applicable limit. An alternative correction is to distribute the excess contributions of one or both of the spouses no later than their tax return due date. Excess contributions are subject to the Code Section 4973 excise tax. The Notice provides similar excess contribution correction methods for dependent care contribution accounts but any excess contributions remaining in the account will be included in the spouse’s gross income as provided in Code Section 129(A)(2)(B).