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DISCLAIMER: This blog is published for general information only - it is not intended to constitute legal advice and cannot be relied upon by any person as legal advice.  U.S. Treasury Regulations require us to notify you that any tax-related material in this blog (including links and attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding tax penalties, and may not be referred to in any marketing or promotional materials.  While we welcome you to contact our authors, the submission of a comment or question does not create an attorney-client relationship between the Firm and you. 

Entries in Plan Administration (51)


IRS Modifies Health FSA Rules to Permit Carryover of up to $500

 Late last week the IRS released Notice 2013-71, modifying the health flexible spending account (“health FSA”) use-it-or-lose-it rule to allow participants to carry over up to $500 in unused health FSA funds.  Although not unexpected (the Service has hinted at such a change a number of times over the past year), this new feature is welcome relief to participants and plan sponsors.  Plan sponsors may adopt this optional amendment effective as early as the 2013 plan year.

Notice 2013-71 provides that a plan sponsor may, at its option, allow a participant to carry over up to $500 of unused health FSA funds to the immediately following plan year.  Unused health FSA funds are those remaining at the end of the plan’s run-out period (if any), and do not count against the limit on participant salary reduction contributions.  Accordingly, a participant could elect to contribute the full $2,500 (as indexed in future years) permitted by law and also carryover as much as $500.

An employer wishing to adopt this new carryover feature must...

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State Exemptions for Religious Organizations After the DOMA Decision and Revenue Ruling 2013-17

The “place of celebration” rule adopted by the IRS in Revenue Ruling 2013-17 means that legally married same-sex couples are now recognized as married for federal tax purposes regardless of the state in which they reside.  This ruling clearly affects the design and operation of employer-sponsored benefit plans in all states, whether the state recognizes same-sex marriage or some other form of legal relationship between same-sex couples or continues to define marriage as a union between one man and one woman.  Somewhat less clear is how the place of celebration rule will affect the legal obligations of religious organizations in states that recognize same-sex marriage. 

Most states that recognize same-sex marriage exempt religious organizations from the application of statutes that prohibit discrimination based on sexual orientation.  As a result, religious organizations in these states may generally continue to treat an employee in a same-sex union differently than an employee who is married to someone of the opposite sex.  Thus, these state exemptions appear to give religious organizations the right to refuse equal employment benefits to employees in same-sex marriages despite the Service’s guidance.  Questions remain, however, regarding the scope of these exemptions and whether they would survive constitutional scrutiny.

First, many of the state exemptions do not define with specificity what constitutes a “religious” organization. 

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IRS Releases Guidance on DOMA Decision

Yesterday Treasury and the IRS released much needed guidance regarding the U.S. Supreme Court’s decision on the Defense of Marriage Act.  Specifically, Treasury and the IRS ruled that they will adopt a “place of celebration rule” under which legally married same-sex couples will be recognized for federal tax purposes regardless of the state in which they reside.  Importantly, the ruling does not extend this treatment to domestic partnerships (whether registered or not), civil unions, or similar relationships.  Treasury and the IRS will begin to apply this rule on September 16, 2013.

Treasury and the IRS intend to issue additional guidance pertaining to cafeteria plans, qualified retirement plans, and other employee benefit plans and arrangements, and to provide a streamlined process by which employers may obtain refunds on payroll taxes paid on imputed income.  For now, however, we offer the following observations based on the new guidance:

  • Employers should stop imputing the value of welfare benefits provided for the spouse of a same-sex married employee as income for federal tax purposes if the employee and his or her spouse were legally married in any state.  This means that differences between state and federal tax treatment will continue in many states.  Specifically, employers operating in states that do not recognize same-sex marriage may need to continue to impute income at the state level, but not at the federal level.  Similarly, employers operating in states that treat civil unions as marriages for tax purposes may not need to impute income at the state level for benefits provided to the civil union partner of an employee, but would need to impute income at the federal level.
  • Since the ruling expressly allows employees to file refund claims for benefits-related imputed income, employers may want to prepare to answer questions from employees about the amount that was included in their gross income in past years.  (Refund claims will only be allowed for open years, which for most employees would include 2012, 2011, and 2010.)
  • While the guidance may provide some flexibility with respect to the cessation of imputed income for federal income tax purposes, FAQs issued with the ruling make clear that qualified retirement plans must comply with the ruling as of September 16, 2013.  As of that date, for example, a plan that provides for the payment of a spousal death benefit must pay that benefit to the same-sex surviving spouse of a deceased participant.

We will have more to say about these issues soon.  Suffice it to say, this guidance will significantly impact the design and operation of employer-sponsored benefit plans and should be carefully reviewed by plan sponsors.


The Sun Capital Case Could Have Broader Implications for Employee Benefit Plans

The widely publicized case of Sun Capital Partners III, L.P. v. New England Teamsters & Trucking Ind. Pension Fund, No. 12-2312, __ F.3d __, 2013 WL 3814984 (1st Cir. July 24, 2013), has made the private equity investment community a touch uneasy.  In holding that a fund organized by Sun Capital Advisors, Inc. ("Sun Capital") was subject to a withdrawal liability assessment as “trade or business” under the Multiemployer Pension Plan Amendments Act ("MPPAA"), the First Circuit clearly created a new area of risk for private equity firms.  But the Sun Capital case could also have broader implications for the way corporate organizations can be characterized for employee benefits purposes.

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The Verdict on DOMA and Proposition 8: Impact on Employee Benefit Plans

Today the United States Supreme Court overturned Section 3 of the Defense of Marriage Act (“DOMA”) and reinstated a California judge’s order that Proposition 8 (the California ballot initiative defining marriage as between a man and a woman) is unconstitutional.  Although it will take time to sort through the implications of these rulings (which depend somewhat on how they are interpreted by the federal government and individual states), they undoubtedly will have a substantial impact on employer-sponsored benefit plans.  

What the Rulings Do

Section 3 of DOMA defines the words “marriage” and “spouse,” for federal purposes, as referring only to marriages between opposite-sex couples.  As a result of DOMA, the legal marriages of same-sex couples were not recognized under any federal law, including the Internal Revenue Code and ERISA.  This treatment of same-sex spouses as unmarried individuals had far reaching implications in the context of employee benefits and federal income taxation.

As a result of today’s ruling in United States v. Windsor, any federal statute that refers to a “marriage” or a “spouse” must be interpreted as applying with equal force to same-sex married couples, and same-sex couples who are legally married must now be treated the same under federal law as opposite-sex married couples.  It is certain these changes apply to same-sex married couples who live in states that recognize same-sex marriage; it remains to be seen how they will apply to same-sex married couples who come to live in states that do not recognize such marriages.

There will be significant ramifications for employer-sponsored benefit plans in states where same-sex marriages are affected by the ruling:

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