In June, the Supreme Court’s Windsor decision invalidated Section 3 of DOMA (which formerly limited federal recognition of marriage to opposite-sex spouses). But the Windsor ruling still left the determination of marital status to the states, so many issues were unresolved – most notably what happens when a couple marries in a state permitting same-sex marriage but resides in a state that does not recognize it.
On August 29, 2013, IRS issued some important guidance: Revenue Ruling 2013-17 and FAQs for same-sex married couples. Now, it does not matter whether or not you live in a state* that recognize same-sex marriage – what matters is did the marriage take place in one of those states (the “state of celebration”). If so, then the new guidance says spousal benefits and federal tax treatment apply even if you (or your business) are far away from Washington DC or any of the 13 states that recognize same-sex marriage.
Just how does recognition of marital status affect benefits? Where marital status plays a key role in benefits include: taxable status of employer-provided health coverage; COBRA rules; HIPAA special enrollment rights; cafeteria plan election change events; reimbursement rules under Health FSAs and DCAPs; and retirement plan survivor benefit, rollover, hardship, and QDRO rules.
How Does This Impact FSA, HRA and COBRA?
Here we address only the benefit components that NEO manages for our employers – we will let the retirement and health plan advisors comment on how the new guidance affects those components. See how the tax treatment changed overnight for employer-proved benefits for recognized same-sex married couples:
Benefit for Same-Sex Spouse
|Health Coverage For Same-Sex Spouse||Contributions had to be post-tax, and a taxable benefit.||Now nontaxable, or can be paid pretax|
|Use Of Health FSA To Pay Spouse’s Expense||NO – not a qualified expense||YES|
|Change Elections Under Cafeteria (Section 125) Plan||Event due to the spouse not recognized||Now Change of Status or Change in Cost or Coverage events for a spouse could allow change in election.|
|COBRA||Even if spouse was covered, COBRA continuation rights did not apply.||A covered spouse is now a Qualified Beneficiary, with right to continue coverage under COBRA.|
The agencies are expected to issue further guidance on cafeteria plans and how other tax-favored arrangements should treat same-sex spouses for tax periods before the effective date of the ruling.
What about state and local tax treatment?
It is important to recognize that the Windsor ruling as well as yesterday’s guidance speaks to federal tax exclusions. Although most states follow the federal rules, states (and municipalities) that do not recognize same-sex marriage may have a different tax treatment. Thus, taxability of benefits could vary, where for federal tax purposes the benefits in nontaxable, but for state and city it is still subject to income tax and withholding. You should consult with your payroll provider for guidance.
Effective Date is September 16, 2013
The prospective effective date is September 16th, but tax favored treatment of benefits can be claimed retroactively. Both employers and employees can file a claim for refund of overpaid income or FICA taxes for any period where the limitation for filing a claim for refund is open. See Q&A 10 through 14 for the FAQs related to employer-sponsored health benefits and refunds for prior periods.
Here again, the Treasury and the IRS intend to issue more guidance with streamlined procedures for these claims.
Employers can move forward with communicating benefit plan changes now that we have clarification of who is affected. This might include communicating new rules to participants, re-characterizing year-to-date premium deductions for health coverage, and establishing a policy to verify “state of celebration” marriages.
NEO will keep you posted about whatever affects your FSA, HRA or COBRA compliance, as well as any other cafeteria plan rule changes.
*Where Same-Sex Marriage Is Recognized
District of Columbia