Billy Thomas, CPA

A few months ago, the IRS released changes to the flexible spending accounts (FSAs) under cafeteria plans targeting the “Use-it-or-Lose-it” provision. We highlighted these changes and shortly thereafter, the IRS issued further guidance on FSAs for same-sex married couples, in light of the Windsor decision.

In brief, same-sex married couples are now eligible for certain employee benefits under §125 of the Internal Revenue Code, particularly for cafeteria plans. This eligibility begins with the plan year that includes the effective date of the Windsor case (June 26, 2013).

There are three key points raised and answered by IRS Notice 2014-1 (PDF):

1. Mid-Year Changes:
Often the health care premiums paid for the employee’s health coverage are the primary benefit paid pre-tax under these cafeteria plans. So, the cost of the health coverage paid by the employee for a same-sex spouse was not eligible for pre-tax treatment under the cafeteria plan rules prior to the Windsor case ruling because the marriage was not recognized by the federal government.

Now, lawfully same-sex married couples are permitted to make a mid-year change to their pre-tax deferral elections under the cafeteria plans. Changes are only permitted when an employee:

    • Changes the number of dependents
    • Changes his or her employment status
    • Changes residence
    • Changes legal marital status, which now includes same-sex marriages

Therefore, the employee can exclude the amount incurred for health care premiums of his or her same-sex spouse from his or her gross taxable income.

2. FSA Reimbursements:
Under these new regulations, eligible expenses for reimbursement include those incurred by a same-sex spouse, provided the expenses were incurred in a plan year including the date of the Windsor ruling. Add this detail to the new “Use-it-or-Lose-it” rules, and an employee can be reimbursed for eligible [medical] expenses beyond the end of the plan year, further limiting “wasteful” spending or the risk of forfeiture of the money set aside.

As a reminder, the maximum amount eligible for deferral is $2,500 under medical FSA plans.

3. Contribution Limits:
Speaking of limitations, the IRS released guidance (PDF) on the contribution limits for health savings accounts (HSAs) and dependent care FSAs. While the notice references 2013 limitations, we will address the current limits for 2014.

The current maximum contribution to an HSA is $6,550 for an individual with family coverage under a Highly-Deductible Health Plan. This is important because same-sex couples were previously permitted to only make contributions to plans under the individual limits, which when combined exceed the married filing joint limitation of $6,550. Excess contributions above the joint limit should be distributed from these HSAs as soon as possible; otherwise they are subject to an excise tax.

Similarly, the maximum contribution to a dependent care FSA is $5,000 for individuals or joint filers. Prior to the Windsor ruling, it may have been possible for both same-sex partners to exclude more than permitted if both were having amounts withheld in a dependent care FSA pre-tax. The IRS has closed this loophole, as same-sex married couples are now subject to the joint limitation at $5,000.

When the guidance was issued, there was not much time remaining in December 2013 to notify your employer or for an employer to take action to correct these changes. In the event necessary changes have not been made before the end of the plan year, you should file for a refund in April for any employment taxes paid as a result. It is always important to review your eligible employee benefits with your Human Resources department more than once a year when making your elections.

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