The Internal Revenue Service has released draft cafeteria plan regulations that could replace 5 earlier sets of draft regulations proposed from 1984 to 2000.
The proposed rule, “Employee Benefits-Cafeteria Plans,” deals with many aspects of Section 125 cafeteria plan administration.
The IRS hopes to hold a hearing on the proposed rule Nov. 15 and put most sections of the proposed rule into effect Jan. 1. 2009.
The proposed rule would do nothing to eliminate current prohibitions on employees using cafeteria plans to exclude long term care insurance premiums from taxable income.
The proposed rule also would do nothing to eliminate the current “use it or lose it” rule, which causes employees to lose any cash contributed to health flexible spending arrangements or dependent care accounts offered through cafeteria plans if they do not spend the cash by the end of the year.
“The new proposed regulations continue the use-it-or-lose-it rule,” IRS officials write.
But the proposed rule does spell out the procedures for offering short “grace periods” for employees who fail to spend all FSA assets by the end of the plan year, and the proposed regulation
The proposed rule also makes it clear that the employer sponsoring the cafeteria plan “may retain forfeitures, use forfeitures to defray expenses of administering the plan or allocate forfeitures among employees contributing through salary reduction on a reasonable and uniform basis,” officials write.
The proposed rule would define terms such as officer, 5% shareholder, key employee, compensation and “highly compensated individual.”
Under a new test to determine when the election of benefits is discriminatory, the proposed regulations “provide that a cafeteria plan must give each similarly situated participant a uniform opportunity to elect qualified benefits and that highly compensated participants must not actually disproportionately elect qualified benefits,” officials write.
Still other provisions deal with matters such as calculating the amount of employer group life contributions that must be included in an employee’s income, use of debit cards to administer dependent care accounts, and the relationship between cafeteria plans and 401(k) plans.
Officials ask for comments on topics such as how salary reduction contributions could be based on employees’ tips and whether multiple employers may sponsor a single cafeteria plan.
A copy of the proposed rule is on the Web