Potential Year-End Amendment Required for Cafeteria Plans

What you need to know:

The IRS, in response to this summer’s US Supreme Court marriage-equality decision, Obergefell v. Hodges, issued guidance last week concerning the impact of Obergefell on qualified retirement plans and health and welfare plans, including those health and welfare plans offered through Code Section 125 cafeteria plans. The guidance confirms that Obergefell has minimal or no impact on most types of plans because of previously required same-sex marriage plan changes resulting from the United States v. Windsor (2013) decision. However, the IRS identified and provided guidance on a situation unique to cafeteria plans, which could require certain cafeteria plans to be amended by December 31, 2015.

What you need to do:

Employers who, in response to Obergefell, began providing coverage midyear under their cafeteria plan to the same-sex spouses of their employees, may need to amend their cafeteria plans by December 31, 2015. Employers should review their cafeteria plans with their plan provider or attorney to ensure that the plans are in compliance with this IRS guidance.

Overview of guidance:

On December 9, 2015, the IRS issued Notice 2015-86 (the “Notice”).  The Notice contains a set of Q&A’s, of which questions 7 and 8 pertain to Code Section 125 cafeteria plans. More specifically, those two questions discuss implications for employers who began providing coverage under their cafeteria plans to same-sex spouses as a result of Obergefell.  The issue of providing such coverage midyear after Obergefell concerns the general prohibition on midyear cafeteria plan election changes.

There are a number of exceptions to the prohibition on midyear changes, though any permitted exceptions must be included in the plan document. While most cafeteria plans allow midyear election changes as a result of a change in marital status, the Notice is clear that recognition of same-sex marriage as a result of Obergefell is not an actual change in marital status. The Notice does provide, however, that midyear election changes as a result of the recognition of an existing same-sex marriage are generally permissible if the offer of coverage to spouses is a “significant improvement in coverage”, as defined by Treasury Regulation. In the case of a cafeteria plan that does not permit midyear changes as a result of significant improvements in coverage, an amendment may be required.

Cafeteria plans that require amendment by the end of 2015:

The amendment requirement of the Notice applies only in the situation where:

1.  a same-sex employee and spouse were married prior to Obergefell; and
2. the spouse was not covered by the cafeteria plan prior to Obergefell; and
3. the employer began providing coverage under the cafeteria plan to the spouse midyear following the Obergefell decision; and
4. the cafeteria plan document is not drafted to permit midyear election changes for significant improvements in coverage.

If all four above criteria are met, then the cafeteria plan must be amended to retroactively permit such a midyear election by the last day of the plan year (December 31, 2015 for most plans). If a cafeteria plan already provides for midyear election changes for significant improvements in coverage, then no amendment will be necessary provided the employer determines that offering same-sex spousal benefits are a significant improvement in coverage. Also, no amendment is required if in 2015 a same-sex spouse became covered under a cafeteria plan as a result of a marriage in 2015 or through the plan’s open enrollment process.