In August 2013, the Supreme Court announced its decision to the Windsor v. United States Court case recognizing same-sex couples to be treated as married for all federal tax purposes (i.e. income, gift and estate taxes) even if the married couple resides in a state that does not recognize same-sex marriage bringing an end to section 3 (prohibiting same-sex marriage) of DOMA (Defense of Marriage Act). The ruling applied to all federal tax provisions where marriage is a factor, such as: filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, etc.
Recently, the Internal Revenue Service (IRS) released a notice as guidance on the application of these rules on employee benefit plans, such as cafeteria plans (health and dependent care), flexible spending arrangements (FSA), and health savings accounts (HSA) falling under Internal Revenue Code (IRC) Section 125 and Section 223. AG Tax analysts have prepared a brief summary on the key aspects presented in this guidance.
Mid-Year Election Changes to Marital Status
– If a participant in a cafeteria plan marries a same-sex spouse after June 26, 2013, he/she can make a mid-year election change due to a change in legal marital status, provided they satisfy the required regulations including the consistency rule (Treas. Reg. § 1.125-4(c)(3)).
Example: If an employee who enrolled only for self-health insurance through cafeteria plan at the beginning of the year, decides to modify and include their spouse from October, 2013 onwards; on confirmation of the Supreme Court decision. However, the employer did not process the request since there was no guidance from the IRS on its treatment from tax perspective. But, now that the IRS guidance is out, the employer must enroll the employee’s spouse in the health plan as of December 20, 2013 and begin the necessary deductions from the employee’s salary for spousal coverage beginning with the pay period starting from December 20, 2013.
– If the employee has their spouse enrolled for spousal benefits and has made payments through after-tax dollars until December, 2013 s/he may exclude the spousal benefits payments from their gross income while filing the annual tax return (recognizing the payments as pre-tax), and claim a refund on any taxes paid for these benefits.
Flex-Savings Arrangement (FSA) Reimbursement
If the employee has incurred expenses related to their spouse, they may claim a reimbursement of these expenses from the FSA, provided the expenses belong to the particular cafeteria year which includes the date June, 2013; or the date of marriage, if later on.
Example: If Employee enrolled their same-sex spouse into a health FSA in October, 2013; and subsequently applied for a reimbursement of certain expenses incurred in May, 2013. The FSA has to reimburse these expenses even though it was incurred before the court ruling was passed.
Health Savings Account (HSA) Contribution Limit
Section 223 ruling HSAs allows an annual deduction limit of $6,450 for an individual with family coverage. If spouses have separate HSA, the joint deduction limit is the same; any excess contribution needs to be adjusted by lowering the contribution amount to not cross the limit or withdraw the excess amount by either of the spouses before filing the annual return, since any excess contributions are subject to excise tax under IRC section 4973. This rule is equally applicable in the case of same-sex spouses.
Example: Same-sex spouses hold separate HSAs and are contributing according to their individual limit of $6,450. However, following the Supreme Court ruling if they have decided to file as ‘Married Filing Jointly’, the excess $6,450 could be subject to excise tax.
The guidelines provided by IRS regarding employee benefits plan through employer is effective from December 16, 2013 onwards.
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