Due to the IRS's and DOL's adoption of the place of celebration rule, a valid same-sex marriage from another state will be recognized for federal tax purposes in all states.
A significant amount of confusion remains for employee benefit plan sponsors regarding the impact of the Supreme Court's decision in United States v. Windsor and its holding that Section 3 of the Defense of Marriage Act (DOMA) was unconstitutional because it violates the principles of equal protection. Section 3 of DOMA provided that, in any federal statute, the term "marriage" means a legal union between one man and one woman as husband and wife, and that "spouse" refers only to a person of the opposite sex who is a husband or a wife. Please see our prior Alert regarding the Windsor decision for a detailed analysis of the Court's decision.
Specifically, as employers move into 2014, they should ensure that they are in compliance with the guidance issued by both the Internal Revenue Service (IRS) and U.S. Department of Labor (DOL) following the Windsor decision. As outlined below, the IRS has also just issued guidance under Notice 2014-1 that clarifies some issues for employers in light of the Windsor decision.
Revenue Ruling 2013-17 and Technical Release No. 2013-04
Both the IRS and DOL guidance provide that for federal tax purposes and for all purposes under the Internal Revenue Code and ERISA, the term "spouse" will be read to refer to any individuals who are lawfully married under any state law, including individuals married to a person of the same sex who were legally married in a state that recognizes such marriages, but who are domiciled in a state that does not recognize such marriages. Similarly, the term "marriage" will be read to include a same-sex marriage that is legally recognized as a marriage under any state law.
The IRS's and DOL's adoption of the "place of celebration" rule with respect to all marriages is significant to all employers maintaining employee benefit plans, both retirement plans and health and welfare plans. This is because the IRS and DOL require employers to recognize the validity of a same-sex marriage that was valid in the state where it was entered into, regardless of the couple's place of domicile. As a result, employers are not able to simply carve up their employee benefit plans based on the fact that employees work in a state where same-sex marriage is not valid. If the couple was married in a state where same-sex marriage was valid, that marriage will be recognized regardless of where the couple is domiciled.
In addition, the IRS issued Notice 2014-1 on December 16, 2013, to address specific issues under cafeteria plans, flexible spending arrangements (FSAs) and health savings accounts (HSAs) for same-sex spouses following Windsor.
Mid-Year Election Changes Under Cafeteria Plans
Notice 2014-1 provides that a cafeteria plan may treat a participant who was married to a same-sex spouse as of the date of the Windsor decision—June 26, 2013—as if the participant experienced a change in legal marital status for purposes of the mid-year election change rules that are applicable to cafeteria plans. Accordingly, 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 it is filed at any time during the cafeteria plan year that includes June 26, 2013, or the cafeteria plan year that includes December 16, 2013 (i.e., December 31, 2013, for a calendar-year cafeteria plan).
In addition, Notice 2014-1 addresses the issue of a participant who is paying the employee cost of health coverage for a same-sex spouse under a health plan of the employer on an after-tax basis and when, and under what circumstances, the employer must begin to treat the amount that the employee pays for spousal coverage as a pre-tax salary reduction. Notice 2014-1 provides that 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; or (b) a reasonable period of time after December 16, 2013. For this purpose, a participant may provide notice of the participant's marriage by making an election under the employer's cafeteria plan to pay for the employee cost of spousal coverage through salary reduction or by filing a revised Form W-4 representing that the participant is married. It is important to note that Notice 2014-1 requires the participant to provide notice to the employer, not for the employer to seek out such participants.
With respect to FSA reimbursements, Notice 2014-1 addresses whether a cafeteria plan may permit a participant's FSA to reimburse covered expenses incurred by the participant's same-sex spouse. The answer from the IRS is that a cafeteria plan may permit a participant's FSA—including a health, dependent care or adoption assistance FSA—to reimburse covered expenses of the participant's same-sex spouse or the same-sex spouse's dependent that were incurred during a period beginning on a date that is no earlier than (a) the beginning of the cafeteria plan year that includes the date of the Windsor decision or (b) the date of marriage, if later. For this purpose, the same-sex spouse may be treated as covered by the FSA (even if the participant had initially elected coverage under a self-only FSA) during that period.
Contribution Limits for HSAs
Notice 2014-1 clarifies that a same-sex married couple is subject to the joint deduction limit for contributions to an HSA, which is set at $6,450 for the 2013 taxable year and $6,550 for the 2014 taxable year. In addition, Notice 2014-1 provides that if the combined HSA contributions elected by two same-sex spouses exceed the applicable HSA contribution limit for a married couple, contributions for one or both of the spouses may be reduced for the remaining portion of the tax year in order to avoid exceeding the applicable contribution limit. To the extent that the combined contributions to the HSAs of the married couple exceed the applicable contribution limit, any excess may be distributed from the HSAs of one or both spouses no later than the tax return due date for the spouses. Any such excess contributions that remain undistributed as of the due date for the filing of the spouse's tax return (including extensions) will be subject to excise taxes.
Contribution Limits for Dependent Care Assistance Programs
Notice 2014-1 also clarifies that a same-sex couple is subject to the exclusion limit for contributions to a dependent care FSA, which is currently set at $5,000 for a married couple. This limit applies to same-sex married couples who are treated as married for federal tax purposes with respect to a taxable year—that is, couples who remain married as of the last day of the taxable year—including the 2013 taxable year. In addition, if the combined dependent care FSA contributions elected by the same-sex spouses exceed the applicable contribution limit for a married couple, contributions for one or both of the spouses may be reduced for the remaining portion of the tax year in order to avoid exceeding the applicable contribution limit. To the extent that the combined contributions to the dependent care FSAs of the married couple exceed the applicable contribution limit, the amount of excess contributions will be includable in the spouses' gross income.
Written Plan Amendment
Notice 2014-1 addresses whether a written plan amendment is required with respect to the changes it sets forth. It states that a cafeteria plan containing written terms permitting a change in election upon a change in legal marital status generally is not required to be amended to permit a change in status election with regard to a same-sex spouse in connection with the Windsor decision. To the extent that the cafeteria plan sponsor chooses to permit election changes that were not previously provided for in the written plan document, the cafeteria plan must be amended to permit such election changes on or before the last day of the first plan year beginning on or after December 16, 2013 (i.e., December 31, 2014, for a calendar-year cafeteria plan). Such an amendment may be effective retroactively to the first day of the plan year, including December 16, 2013, provided that the cafeteria plan operates in accordance with the guidance under Notice 2014-1.
Action Items for Employers to Consider
While the IRS and DOL guidance settles questions with respect to federal law and federal tax treatment for same-sex married couples under the Internal Revenue Code and ERISA, it does not resolve the differences that remain under state law. Therefore, in states where same-sex marriage is not recognized, impacted same-sex couples will be subject to certain favorable IRS and DOL treatment from a federal tax perspective, but will remain subject to potentially burdensome state law tax treatment.
Employers in all states should prepare for these issues. The fact that an employer has employees working only in a state that does not recognize same-sex marriage does not settle the issue. Due to the IRS's and DOL's adoption of the place of celebration rule, a valid same-sex marriage from another state will be recognized for federal tax purposes in all states. Employers may want to address how they handle same-sex couples who have been married in another state. For example, if the employer requires all employees to provide evidence of their marriage through supplying a marriage certificate, they should do the same with respect to a same-sex marriage performed in another state.
Notice 2014-1 also sets forth key action items for employers—namely regarding the proper treatment of election changes under a cafeteria plan and same-sex spouse participation in an FSA or HSA.
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Duane Morris attorneys assist employers with questions regarding the issues addressed in this Alert, as well as the issues that the IRS and DOL will address in future guidance.
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