IRS Guidance Confirms Treatment of Same Sex Spouses under Cafeteria Plans

IRS Notice 2014-01, issued yesterday, provides helpful guidance for the administration of cafeteria plans after the U.S. Supreme Court’s decision in the Windsor case. The guidance provides answers to a number of questions that employers and plan administrators have been asking, including the following:

May a participant who was married to a same-sex spouse as of the date of the Windsor decision (June 26, 2013) be treated as if he or she experienced a change in legal marital status? Yes. The decision to recognize same sex marriages for federal law purposes for the first time amounts to change in legal marital status. 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.

Would a change in the tax treatment of a benefit offered under a cafeteria plan be considered a significant change in the cost of coverage? No. The fact that same sex married couples can be covered without the imputation of income (and pre-tax dollars can be used to purchase benefits) does not constitute a significant cost change for purposes of permitting a status change. For periods between June 26 and December 31, 2013, however, a cafeteria plan will not be treated as having failed to meet the cafeteria plan requirements if the plan permitted a participant with a same-sex spouse to make a mid-year election change based on a significant change in the cost of coverage.

At what point must an employer begin to allow pre-tax salary reductions for same sex married couples? If an employer receives notice before the end of the cafeteria plan year including December 16, 2013 (the publication date of the IRS Notice) that a participant is legally married, then the employer 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 under Code Section 3402, or (b) a reasonable period of time after December 16, 2013.

At what point may a cafeteria plan permit a participant’s flexible spending account to reimburse covered expenses for a same sex spouse? A cafeteria plan may permit FSA reimbursements for the covered expenses of a same-sex spouse, or of a 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. This would include a health, dependent care, or adoption assistance FSA to reimburse covered expenses of the participant’s same-sex spouse.

Much more post-Windsor guidance is expected early next year to deal with a variety of issues under retirement plans as well as, in general, the possible retroactive effect of the invalidation of Section 3 of the Defense of Marriage Act.