In IRS Notice 2014-1, 2014‑2 I.R.B. 270 (Jan. 6, 2014), the IRS dealt with various consequences of the Windsor decision on same-sex couples who participate in benefit plans. The notice is based upon Revenue Ruling 2013-17, 2013‑38 I.R.B. 201, which generally provides that a same-sex marriage is valid under federal law if it is valid in the state in which it was celebrated, regardless of where the parties reside thereafter.
Two particular issues discussed in the Notice deserve special attention. First, the Notice suggests that for purposes of certain benefit plans allowing beneficiaries to change benefit options only under limited circumstances, such as a change in marital status, the Windsor decision will be treated as a change in marital status. For example, if a couple had a same-sex marriage which was valid under state law, that marriage was not recognized by federal law before Windsor was decided. When Windsor required the federal government to recognize the marriage, the parties' marital status changed for purposes of federal law, allowing them to select new benefit options, even though the parties' marital status under state law remained
Second, many taxpayers are finding significant financial advantages in high-deductible health insurance plans and their associated Health Savings Accounts (“HSAs”). Taxpayers make regular tax-contributions to HSAs, and the amount of these contributions is generally not taxable income. But the total annual amount of the contributions is limited in amount, and when either spouse elects family coverage, there is a single cap applying to contributions made by the entire family.
Assume that before Windsor, a same-sex couple enters into a valid marriage under state law. Both spouses are employed and both elect to create HSAs. Because they have children, at least one spouse elects family coverage. They then plan their deductions so that each spouse will have the maximum permitted amount withheld from his or her salary and deposited in the HSA. Since the parties' marriage is not recognized by federal law, each spouse makes the maximum contribution permitted for an unmarried person.
Then, Windsor is decided, and the parties' marriage is recognized by federal law, partway through the tax year. Because at least one spouse elected family coverage, there is a single combined maximum deduction which applies to the entire family. But this amount is materially less than twice the maximum deduction for unmarried persons, so that if the 2013 deductions occur as originally planned, the total deduction for both spouses in tax year 2013 will exceed the maximum allowed for family coverage.
Prudent taxpayers may have seen this problem coming and reduced their post-Windsor HSA deductions to fall within the lower maximum. But many taxpayers do not consider tax issues until the time comes to prepare and file returns.
IRS Notice 2014-1 confirms that if a same-sex couple in this situation exceeds the maximum allowed deduction for family coverage under an HSA, they must pay the excise tax charged on excess contributions. I.R.C. § 4973. It notes, however, that under I.R.C. § 223(f)(3), excess contributions can be distributed out of an HSA back to the owners at any time before the date for filing that's year's tax return. These distributions are treated as taxable income, but they are not subject to the excise tax.
Thus, if a same-sex couple contributes too much to an HSA because the recognition of their marriage by Windsor reduced the allowable maximum annual HSA contributions, the remedy is to distribute the excess contributions (and any income earned on those contributions) before the due date of the couple's 2013 tax return.