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The passage of the Economic Growth and Tax Relief Reconciliation Act, and the promulgation of Final Treasury Regulations governing permitted mid-year election changes, have now set the menu for cafeteria plans.

The rules of etiquette for the offering have also been established. Employers are invited by Congress and the Internal Revenue Service to allow their employees to feast on an array of welfare and fringe benefits without uncertainty as to their present or future taxability.

EGTRRA also gives employers and their benefits advisors guidance on the proper way to administer participant requests for election changes to cafeteria or Internal Revenue Code Section 125 plans and avoid loss of the plans tax qualified status.

EGTRRA passed with much fanfare among pension plan providers because it contains many important revisions to the Internal Revenue Code rules governing pensions. However, EGTRRAs significance is not limited to its favorable impact on employee pension plans. EGTRRA is also newsworthy for the impact it has on welfare and fringe benefit plans.

Under EGTRRA, certain fringe benefits that were scheduled to lose their status as “tax-free” benefits at the end of this calendar year are made permanent.

Educational assistance programs under Code Section 127, for example, were scheduled for phase-out Dec. 31, 2001. Under EGTRRA, Code Section 127 will now permit employees to exclude from gross income certain amounts received from an employer for undergraduate education expenses for the foreseeable future.

Two additional exclusions from gross income were also added. Educational assistance for graduate-level courses, and employer-provided retirement advice and financial planning education, are excludable from an eligible employees gross income, effective Jan. 1, 2002.

Another item presently excludable from gross income and scheduled for phase-out on Dec. 31st of this year was adoption assistance. EGTRRA not only makes the adoption assistance exclusion permanent, it also raises the limit of the permitted exclusion from $5,000 to $10,000 for qualified adoption expenses.

One fringe benefit arrangement left unaffected by EGTRRA is the group legal plan. Code Section 120, which excluded certain group legal benefits from the gross income of employees, expired on June 30, 1992. This exclusion is not resurrected by Congress in EGTRRA.

Finally, EGTRRA affirmatively clarifies for fringe benefit sponsors and administrators what legal commentators have long been observing. Certain fringe benefit plans, including group term life insurance; accident or health plans; cafeteria plans; and dependent care assistance plans, may qualify as both “specified fringe benefit plans” and “employee welfare benefit plans” under the Code and ERISA.

The consequence of this clarification is to put employer-sponsors of such plans on notice that they may be obligated, not only to file Form 5500s for these plans after the close of each plan year, but also to fulfill ERISAs record-keeping, notice and disclosure requirements. Participants of these specified fringe benefit plans should expect to receive a flurry of new summary annual reports and summary plan descriptions as a consequence of this particular piece of legislation.

Add to the changes brought by EGTRRA the modifications made by the Treasury Regulations issued in January of this year, and cafeteria and other fringe benefit plan sponsors have much to think about in the 2002 plan year. Under the new Treasury Regulations, employees are now permitted to revoke and change elections under a cafeteria plan in more than 12 different circumstances.

Permitted mid-year election changes include circumstances such as when participants take FMLA leaves of absence, when a participant or dependent qualifies for Medicare or Medicaid, and when there is a significant change in the cost of a benefit offered under a plan. Not all permitted mid-year election changes apply to all kinds of cafeteria plan benefits, so employer-sponsors are well advised to learn all the rules of “etiquette” for this particular Internal Revenue Service offering before providing them to participants.

Clearly, although the “feast” of cafeteria plan benefits is made ample by EGTRRA, the complexity of the administration responsibilities for employer-sponsors is daunting. Hopefully, with the help of professional advisors and legal counselors, employers will be able to offer their employees a chance to take advantage of EGTRRAs offerings without running afoul of EGTRRAs and the Treasury Regulations new legal limitations.

, M.B.A., S.P.H.R., is president of The Compliance Company L.L.C., Oklahoma City.


Reproduced from National Underwriter Life & Health/Financial Services Edition, October 8, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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