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Healthcare and Childcare FSA Fix for 2021, Finally: Special Carryover Rules and More

The Consolidated Appropriations Act provides tax relief for workers who socked away pre-tax money into flexible spending accounts (FSAs) for 2020 and couldn’t use it because of the coronavirus pandemic. Now employees may be able to carry over all of their unused funds to use later. Even ex-employees might get more time to spend down unused money instead of forfeiting it.

In a recent article in Forbes, McDermott partner Jacob Mattinson speaks to the employer perspective on FSA carryovers.

Access the article.

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Same-Sex Marriage Is Legal in All 50 States: So What Now?

Now that same-sex marriage is legal in all 50 states, most benefits plans will treat same-sex spouses the same as opposite-sex spouses. But several tricky issues remain. For example, what if an employer with religious beliefs wants to continue to exclude same-sex spouses from receiving benefits under its retirement plans? Or its medical and dental plans? Are employers that deny coverage vulnerable to sexual orientation and/or sex discrimination lawsuits under state and local law or to federal Title VII lawsuits? What has the EEOC said about this issue? In addition, should employers consider dropping benefits for unmarried partners? Is the answer different if the employer’s plans cover both same-sex and unmarried opposite-sex partners?

The following presentation highlights some of these considerations.

View presentation slides.

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Illinois Reverses Position on Income Tax Treatment of Benefits for Civil Union Partners

by Elizabeth A. Savard, Todd A. Solomon and Brian J. Tiemann

The Illinois Department of Revenue recently issued guidance reversing its position on the state income tax treatment of benefits for non-dependent civil union partners.

Federal law excludes amounts that an employer pays toward medical, dental or vision benefits for an employee and the employee’s spouse or dependents from the employee’s taxable income.  However, because civil union partners are not recognized under federal law, employers that provide these same benefits to employees’ civil union partners must impute the fair market value of the coverage as income to the employee that is subject to federal income tax, unless the civil union partner otherwise qualifies as the employee’s “dependent” pursuant to Section 152 of the Internal Revenue Code.

The Illinois Department of Revenue previously indicated that Illinois would follow the federal approach in taxing the fair market value of employer-provided coverage for non-dependent civil union partners because state law did not provide an exemption from such taxation.  However, recent guidance issued by the Department of Revenue reverses that position and indicates that employer-provided benefits for a non-dependent civil union partner are now exempt from Illinois state income taxation.  Illinois civil union partners are directed to calculate their state income taxes by completing a mock federal income tax return as if they were married for purposes of federal law.

In addition, for federal tax purposes, employees may not make pre-tax contributions to a Section 125 cafeteria plan on behalf of a non-dependent civil union partner (i.e., contributions for the partner generally must be after-tax) and may not receive reimbursement for expenses of the non-dependent civil union partner from flexible spending accounts (FSAs), health reimbursement accounts (HRAs) or health savings accounts (HSAs).  However, for Illinois state tax purposes, the employee now can be permitted to pay for the non-dependent civil union partner’s coverage on a pre-tax basis.

Employers providing medical, dental or vision benefits to civil union partners residing in Illinois should take action to structure their payroll systems to tax employees on the fair market value of coverage for employees’ non-dependent civil union partners for federal income tax purposes, but not for state purposes.

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