IRS Puts Out Updated Cafeteria Benefit Plan Proposed Regs

August 3, 2007 (PLANSPONSOR.COM) - Employers offering cafeteria plan benefits are getting new guidance with the release of new proposed reorganized and updated regulations for the plans from the Internal Revenue Service (IRS).

According to the latest IRS document, the tax agency is pulling back earlier proposed regulations issued in 1984, 1989, 1997 and 2000 as well as February 1986 temporary rules.

The new document deals with:

  • general rules on qualified and nonqualified benefits in cafeteria plans,
  • general rules on elections,
  • general rules on flexible spending arrangements (FSAs),
  • general rules on substantiation of expenses for qualified benefits; and
  • nondiscrimination rules.

The IRS explained in the document that the new proposed regulations reflect changes in tax law since the prior regulations were proposed. Changes addressed include the change in the definition of dependent and the addition of the following as qualified benefits: adoption assistance, additional deferred compensation benefits, Health Savings Accounts (HSAs) and qualified HSA distributions from health FSAs

The IRS document also deals with:

  • new proposed regulations clarifying the general rule in the prior proposed regulations that section 125 is the exclusive means by which an employer can offer employees a choice between taxable and nontaxable benefits without the choice itself resulting in a tax liability for the employees. “When employees may elect between taxable and nontaxable benefits, this election results in gross income to employees, unless a specific Internal Revenue Code section intervenes to prevent gross income inclusion.” the document said.
  • reasons a plan would fail to satisfy the IRS requirements include: offering nonqualified benefits; not offering an election between at least one permitted taxable benefit and at least one qualified benefit; deferring compensation; failing to comply with the uniform coverage rule or use-or-lose rule; allowing employees to revoke elections or   requirements; paying or reimbursing expenses incurred for qualified benefits before the effective date of the cafeteria plan or before a period of coverage; allocating experience gains (forfeitures) other than as expressly allowed in the new proposed regulations; and failing to comply with grace period rules.
  • a mandate that participants in a cafeteria plan must be permitted to choose among at least one permitted taxable benefit and at least one qualified benefit and that the written cafeteria plan must specify that only employees may participate in the cafeteria plan. The new proposed regulations also require that all provisions of the written plan apply uniformly to all participants.
  • requirements that qualified benefits must be current benefits. In general, a cafeteria plan may not offer benefits that defer compensation or operate to defer compensation.
  • a clarification of whether certain benefits and plan administration practices defer compensation.

Those interested in commenting on the new proposed regulations can send their submissions to: CC:PA:LPD:PR (REG-142695-05), room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-142695-05), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, DC or sent electronically via the Federal eRulemaking Portal at REG-42695-05). 

Written or electronic comments must be received by November 5, 2007 .

The new proposed regulations are available    here .