0IRS Releases FAQs on Cafeteria Plan Benefits for Same-Sex Spouses Post-DOMA
As discussed in the July 8, 2013 Employee Benefits Update (the “July Update”), and the October 16, 2013 Employee Benefits Update (the “October Update”), the U.S. Supreme Court’s ruling in the Windsor case struck down Section 3 of the Defense of Marriage Act (“DOMA”). Under the Windsor case and subsequent IRS guidance (discussed in the July Update and the October Update), individuals who are in a same-sex marriage that is recognized under applicable state law are considered to be married when applying federal tax statutes and regulations that refer to or involve marital status.
The Internal Revenue Service (“IRS”) recently issued Notice 2014-1 (the “Notice”), which clarifies several outstanding questions for the 2013 tax year regarding elections, contributions and reimbursements under Section 125 flexible benefit plans (“Cafeteria Plans”) and contribution limits to a Health Savings Account (“HSA”) and a Dependent Care Arrangement (“DCA”).
Mid-Year Election Changes
Under the Notice, 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, and permit such participant to make a new election under the plan. Such an election may be accepted by the plan any time during the Cafeteria Plan year that includes June 26, 2013 (i.e., for a calendar year plan, any time during 2013), as well as the Cafeteria Plan year that includes December 16, 2013.
A plan will not be treated as having failed to meet the requirements of Section 125 to the extent that such elected spousal coverage under the plan becomes effective no later than the latter of (a) the date that coverage under the plan would be added pursuant to the plan’s usual procedures for change in status elections, or (b) a reasonable period of time after December 16, 2013. Elections must otherwise meet the rules and regulations applicable to mid-year election changes under the plan and IRS regulations.
Tax Treatment of Cafeteria Plan Contributions
The Notice provides that, if an employer receives notice from a Cafeteria Plan participant indicating his or her status as married to a same-sex spouse, the employer must begin treating for withholding purposes any amount that such participant pays for the spousal coverage as a pre-tax salary reduction under the plan no later than the latter 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.
While not addressed in the Notice, for purposes of wage reporting the applicable rules generally require that an employer file a report that it believes is accurate at the time of filing with the IRS. Accordingly, an employer who has been notified of an employee’s same-sex marriage status should report the value of all 2013 employee contributions for such employee’s same–sex spouse as pre-tax contributions on the employee’s 2013 Form W-2.
Similarly, the value of an employer’s 2013 contribution for the health coverage of the employee’s same-sex spouse should be not reported as taxable income on the employee’s Form W-2. Notwithstanding whether an employer withheld employee contributions for same-sex spousal coverage as pre-tax or after-tax contributions, the amount that a participant pays for spousal coverage is excluded from the gross income of such participant and is not subject to federal income or federal unemployment taxes. Although an employee may file an amended return with respect to all open tax years, employers are not required to amend Forms W-2 for years prior to 2013.
Reimbursements From Flexible Spending Accounts
For reimbursements from an employee’s health care or dependent care flexible spending account, the Notice provides that a Cafeteria Plan may permit reimbursement from a participant’s account for covered expenses incurred by the participant’s same-sex spouse during a period beginning on the first day of the Cafeteria Plan year that includes June 26, 2013, or the date of such participant’s marriage, if later.
HSA and DCA Contribution Limits
Under the Notice, a same-sex married couple is subject to the married person joint contribution limits for contributions to an HSA or DCA (which married person joint contribution limits were $6,450 and $5,000 respectively for 2013, compared with the single person contribution limits of $3,250 and $2,500 respectively).
If a couple has made an excess contribution to an HSA for 2013, in order to avoid exceeding the applicable contribution limit such excess contribution may be distributed to the participant prior to the tax return due date for both spouses for 2013. The Notice does not provide a comparable distribution mechanism for excess contributions to a DCA; the excess dependent care contributions should be reported by the taxpayers as taxable compensation.
A Cafeteria Plan which permitted a change in election upon a change in legal marital status generally does not need to be amended in order to permit participants with a same-sex spouse to elect same-sex spouse coverage in connection with the Windsor decision. However, if a plan did not permit a change in election upon a change in legal marital status, such a plan would need to be amended to permit such an election. The deadline for making such an amendment is the last day of the first plan year that begins on or after December 16, 2013.
0Supreme Court Upholds Enforcement of Plan Document’s Limitations Period for Benefit Claims
On December 16, 2013, the Supreme Court issued its decision in Heimeshoff v. Hartford Life & Accident Ins. Co. The Court held that an ERISA plan provision setting forth a limitations period for commencing a court action challenging a benefit claim denial, and specifying the date on which that limitations period begins, is enforceable so long as the limitations period is not unreasonably short. In light of this ruling, plan sponsors should review their welfare and retirement plan documents and consider incorporating limitation periods if those documents do not already provide one.
The plaintiff, Julie Heimeshoff, participated in an ERISA-covered disability plan under which benefits were provided through an insurance policy. The policy – a plan document for this purpose – included the following language establishing a limitations period for commencing court actions for benefit claims: “Legal action cannot be taken against [the insurer] . . . [more than] 3 years after the time written proof of loss is required to be furnished according to the terms of the policy” (the “Plan Limitations Provision”).
In August 2005, Heimeshoff filed a claim for benefits under the plan, which the insurer denied. After the insurer granted her an extension of time, Heimeshoff requested that the insurer review the denial and filed additional information to support her claim in September 2007. The insurer denied that appeal on November 26, 2007. Almost three years after the final denial, on November 18, 2010, Heimeshoff brought suit under ERISA against the insurer and the plan sponsor in federal district court in New York, seeking review of the denial of her claim.
The district court dismissed the complaint as barred by the Plan Limitations Provision. In particular, the district court rejected Heimeshoff’s argument that the three-year period prescribed by the Plan Limitations Provision should have begun to run on the date of the insurer’s final denial her benefits appeal.
The federal court of appeals based in New York affirmed. The Supreme Court agreed to review the decision to resolve a split among the federal courts of appeals regarding the enforceability under ERISA of plan-based limitations periods like the one set forth in the Plan Limitations Provision. The federal government sided with Heimeshoff and urged the Supreme Court to hold that the Plan Limitations Provision was contrary to ERISA and unenforceable.
The Supreme Court’s Analysis
A unanimous Supreme Court affirmed the court of appeals decision, holding that the Plan Limitations Provision was enforceable against Heimeshoff and required dismissal of her complaint.
The Court observed that ERISA does not provide a statute of limitations for actions challenging benefit claim denials, and that, in general, courts have borrowed the most nearly analogous state statutes of limitations. However, relying on precedent developed in contract cases where the parties had agreed to a specific limitations period, the Court decided that it must enforce the Plan Limitations Provision as written, unless it determined that either (i) the applicable limitations period was unreasonably short, or (ii) controlling law prevented that plan provision from taking effect.
The Court determined that the period specified under the Plan Limitations Provision – three years from the date “proof of loss” is due – was not unreasonably short, even though a claimant generally could bring suit only after exhaustion of the administrative claims procedures under applicable ERISA regulations.
In this regard, the Court noted that those administrative procedures typically would be exhausted within a year, leaving the claimant with another two years to file a court action challenging the claim denial. Even in Heimeshoff’s case, where the claims procedures took longer than usual, she had almost one year to bring suit after the final denial of her claim and before the end of the three-year period in the Plan Limitations Provision.
The Court also concluded that no controlling law prevented enforcement of the Plan Limitations Provision. Heimeshoff and the federal government argued that application of the Plan Limitations Provision would undermine the goals of the ERISA regulations that prescribe administrative claims procedures because the longer the claimant and plan took in working through those procedures, the shorter the claimant would have after conclusion of the procedures to file suit.
The Court rejected this argument, explaining that this circumstance would not, as a practical matter, cause claimants to fail to develop evidence at the administrative review stage because it is in the interest of claimants to pursue an efficient resolution through the administrative procedures (and, in any event, to establish an adequate administrative record in case they decide to challenge the administrative determination in court).
The Court also disagreed with the government’s suggestion that plan administrators would attempt to delay claims processing under the administrative procedures in order to shorten the effective limitations period following conclusion of those procedures.
It noted that such a tactic would be inconsistent with ERISA’s claims procedures regulations, that such conduct could provide a basis for using waiver or estoppel principles to prevent the administrator from raising the limitations defense, and that, in any event, there was no substantial historical evidence that the application of limitations periods like the one in the Plan Limitations Provision had actually thwarted judicial review of claim denials.
Considerations for Plan Sponsors
In light of the Heimeshoff decision, plan sponsors should review their welfare and retirement plan documents and consider whether it would be advantageous to add limitations periods on benefits claims to plans that do not currently provide for one. In this regard, ERISA does not by its terms provide a statute of limitations for benefit claims.
In general, in determining the deadline for bringing a court action under ERISA to challenge a benefit denial, courts have borrowed the statute of limitations for the “most analogous” type of claim under the law of state where the suit is brought (or, in some cases, the governing state law specified in plan documents).
This has led to inconsistency and uncertainty, with the limitations period in some cases being as short as six months and in others as long as 15 years. Incorporating a limitations period into the plan document can reduce uncertainty and promote consistency, fairness, and efficiency.
Marian A. TseRetired Partner
Scott A. WebsterRetired Partner
James T. MattusPartnerCo-Chair, ERISA & Executive Compensation
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