The Internal Revenue Service and the U.S. Treasury Department have released a 124-page draft of cafeteria plan regulations that could replace the tall pile of regulations, interim regulations, revenue rulings and notices that have been used to run the plans.
The proposed regulations deal with topics such as the fate of unused funds in cafeteria plan flexible spending arrangements, methods for calculating the amount of group life premiums that can be excluded from an employee’s taxable income, procedures for keeping a cafeteria plan from discriminating against ordinary employees, and interactions between cafeteria plans and other types of benefit plans.
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.
Benefits experts agreed that, in most cases, the proposed regulations appear to restate the rules that cafeteria plans have already been following.
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“Nothing in the proposed regulations looks startling,” said Kevin O’Hara, a vice president at Corporate Synergies Group Inc., Mount Laurel, N.J., a benefits brokerage firm. “There’s nothing horrific.”
But “I think 124 pages is significant,” said Susan Relland, a benefits lawyer at Miller & Chevalier Chartered, Washington.
The proposed regulations make enough changes that most cafeteria sponsors will have to change plan documents, Relland predicts.
William Sweetnam Jr., a lawyer at Groom Law Group Chartered, Washington, who has been the benefits tax counsel at the U.S. Treasury Department, said the benefits community should expect to see the IRS draft many more comprehensive regulations in the next few years.
One reason is to simplify compliance for everyone, but another is many regulators are now in their 50s or 60s, Sweetnam said.
Before the veteran regulators retire, the IRS and the Treasury Department “want to make sure they have all that institutional knowledge written down,” Sweetnam said.
For insurance agents, brokers and consultants who work in the executive benefits market, the provisions in the proposed regulations of most interest may be sections that define terms such as officer, 5% shareholder, key employee, compensation and “highly compensated individual.”