On Friday, June 26, 2015, the Supreme Court published its ruling in Obergefell v. Hodges, holding (by a 5 to 4 margin) that the Fourteenth Amendment requires a state to license marriages between two people of the same sex, and to recognize any such marriage that is lawfully licensed and performed out-of-state. As a result, all (remaining) state laws or constitutional amendments banning same-sex marriage are now invalid.
When it comes to health coverage, many employers draw a distinction between full-time and part-time employees. To be eligible to enroll in the employer’s health plan, an employee must work a minimum number of hours per pay period. But many of those same employers then allow even part-time employees to contribute to a health flexible spending account (“health FSA”). After all, doing so costs the employer nothing (and even saves a modest amount in employment taxes), and why not at least give those employees an opportunity to pay some of their medical expenses on a pre-tax basis? Unfortunately, this paternalistic approach may now subject an employer to substantial daily penalties under the Affordable Care Act (“ACA”).
Thanks to recent IRS guidance, sponsors of health FSAs may now allow employees to carry over up to $500 of their account balance from one plan year to the next. Notice 2013-71 creates a new exception to the “use-it-or-lose-it rule” that has long discouraged employees from contributing to a health flexible spending account (“health FSA”). This new carryover option is immediately available, but FSA sponsors who wish to implement this option in either 2013 or 2014 will need to act quickly.
Many employers are concerned that the “market reforms” included in the Affordable Care Act (“ACA”) will lead to an unacceptable increase in the cost of providing health coverage to their employees. In response, some employers have considered moving to an “account balance” approach. They would simply deposit pre-tax dollars into an account (such as a health reimbursement arrangement, or “HRA”) that each employee could then use to purchase individual health insurance. However, in coordinated guidance issued on September 13, 2013, the three agencies charged with implementing the ACA have slammed the door on this approach.
The American Taxpayer Relief Act of 2012 (i.e., the fiscal cliff legislation) includes an amendment to the Tax Code that expands the availability of “in-plan Roth conversions.” Since 2010, 401(k) plans, 403(b) plans, and governmental 457(b) plans have had the option of allowing participants to convert certain pre-tax amounts held in the plan to after-tax Roth amounts (in a taxable “in-plan” rollover transaction). However, such “in-plan Roth conversions” were limited to amounts that were otherwise distributable under the tax laws. The new legislation removes the requirement that amounts must be “distributable” before they can be converted. As a result, plans that include a Roth contribution feature may (but are not required to) allow participants to convert any pre-tax amounts held under the plan (whether attributable to employee deferrals, employer contributions or rollover contributions) to after-tax Roth amounts in a taxable “in-plan” Roth conversion, regardless of whether the participant has attained age 59½.
In Notice 2012-40, the IRS has provided welcome guidance on the application of the $2,500 annual limit on salary deferral contributions to a health flexible spending account (“health FSA”). This limit was imposed by the 2010 Affordable Care Act (“ACA”), though only for “taxable years beginning after 2012.” Among other points made in the Notice, the IRS interprets “taxable year” to refer to an FSA’s plan year. Thus, the earliest this limit will apply to any FSA is January 1, 2013. The Notice also provides an extended period of time for FSA sponsors to adopt the required amendments.