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J. Robert Brame and David S. Fortney, Editors
McGuireWoods LLP and Fortney & Scott, LLC
Vol. 5, No. 1
September 2007
EMPLOYEE BENEFITS
New rules issued for cafeteria plans
The IRS has issued new proposed regulations for Section 125 cafeteria plans that include guidance on when plans unlawfully discriminate in favor of highly compensated employees. The proposed regulations consolidate and withdraw previously proposed
regulations. This is the first time the agency has published the guidance in one place rather than dispersed among previous proposed rules, informal guidance, and revenue rulings.
Unlike prior proposals, the new proposed regulations provide an objective test to determine when the actual election of benefits is discriminatory. They generally preserve many of the rules already in place but provide clarification on certain issues
that have arisen since the prior regulations were published.
Cafeteria plans permit employees to choose between receiving taxable cash compensation or tax-free benefits such as health care, dependent care, and certain other benefits. Here are some highlights of the proposed regulations:
- The regulations provide clarification that Section 125 is the exclusive means by which an employer can offer employees a choice between taxable and nontaxable benefits.
- They state that cafeteria plans must be in writing and must be
operated in accordance with written plan terms.
- They permit a cafeteria plan (but not a health flexible spending account) to pay or reimburse substantiated individual accident and health insurance premiums and COBRA premiums.
- They require
that if the plan includes a flexible spending arrangement, the written plan must include provisions complying with the uniform coverage rule and use-or-lose rule.
- They provide guidance on the application of the nondiscrimination rules with
regard to key employees and highly compensated individuals, including definitions of key terms and guidance on when contributions and benefits violate the nondiscrimination rules.
- They allow a written cafeteria plan to provide an optional grace
period immediately following the end of each plan year, extending the period for incurring expenses for qualified benefits — excluding paid time off or contributions to 401(k) plans.
Employers often forget that nondiscrimination rules
apply to their plans and should carefully review the new rules to ensure compliance. The proposed rules are expected to apply to plan years beginning on or after January 1, 2009, but the IRS said that employers may rely on them for guidance until the
final regulations are issued.
Copyright 2007 M. Lee Smith Publishers LLC
FEDERAL EMPLOYMENT LAW INSIDER does not attempt to offer solutions to individual problems but rather to provide information about current developments in federal employment law. Questions about individual problems should be addressed to the federal
employment law attorney of your choice.
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