Tax News

CCH (cch.taxgroup.com) reports:

The IRS has released proposed regulations relating to the administration of cafeteria plans and the benefits that can be offered as a part of a cafeteria plan. The proposed regulations incorporate changes made by legislation since previous proposed regulations were drafted. The regulations consolidate and withdraw prior proposed regulations and replace a temporary regulation previously withdrawn by T.D. 9349 (TAXDAY, 2007/08/01, I.1). The rules contained in the new proposed regulations are substantially unchanged from the withdrawn proposed regulations, with only minor changes to reflect legislation and for clarification. The withdrawn proposed regulations were organized in question-and-answer format, but the new proposed regulations have abandoned that format.
Proposed Reg. §1.125-1
The new Proposed Reg. §1.125-1 contains guidance on the basic framework of a cafeteria plan, including definitions, rules regarding plan requirements, rules regarding eligible participants in a cafeteria plan and qualified benefits that can be offered in a cafeteria plan. Very few changes are included in these proposed regulations. However, the rules that disallow owner-employees from participation in a cafeteria plan are expanded to include two-percent shareholders in a S corporation. Also, the rule of Notice 89-110, 1989-2 CB 447, to determine how much income a participant should include for the cost of life insurance with a benefit in excess of $50,000 is removed to apply an amount based on Table I of Notice 89-110. Further, the written cafeteria plan must indicate a plan year that consists of 12 consecutive months, a short plan year is only permitted for a valid business purpose. Finally, the definition of a dependent is altered to reflect changes made to Code Sec. 152 by the Working Families Tax Relief Act (P.L. 108-311).
Proposed Reg. §1.125-2
The new Proposed Reg. §1.125-2 consolidates and clarifies the rules regarding the election of cafeteria plan benefits. These rules include the proper timing of elections, the general irrevocability of elections, the use of electronic media (rather than paper) for making the elections, the allowance of automatic elections for employees who fail to timely make elections, elections of salary reductions for health savings account (HSA) contributions and the proper election period for new employees.
Proposed Reg. §1.125-5
Proposed Reg. §1.125-5 contains the rules for the inclusion of a flexible spending arrangement (FSA) is a cafeteria plan. Included are rules that require the written plan to include uniform coverage and the use-or-lose rules, and the general requirements of a qualified FSA plan.
Proposed Reg. §1.125-6
Proposed Reg. §1.125-6 contains the rules for the proper substantiation of incurred costs that are to be reimbursed under a health and accident plan, an FSA or a health reimbursement account (HRA). These rules include the use of debit cards for purposes of substantiation permitted by Rev. Rul. 2003-43, 2003-1 CB 935, and Notice 2007-2, I.R.B. 2007-2, 254 (TAXDAY, 2006/12/15, I.2), inter alia .
Proposed Reg. §1.125-7
Proposed Reg. §1.125-7 contains restated guidance on the application of the nondiscrimination rules with regard to key employees and highly compensated individuals. The new guidance includes definitions of key terms and additional guidance on when contributions and benefits violate the nondiscrimination rules.
Effective Date
The new proposed regulations are proposed to generally apply to plan years beginning on or after January 1, 2009.
Comment Request and Hearing
The IRS has requested written or electronic comments, specifically comments on whether multiple employees can sponsor a single cafeteria plan, whether salary reductions can be based on tip income, and how a participant's uniform coverage amount should be computed if an election is made pursuant to a participant's change in status. A public hearing on the proposed regulations has been scheduled for November 15, 2007, beginning at 10:00 a.m.
Proposed Regulations, NPRM REG-142695-05, 2007FED ¶49,757
Other References:
Code Sec. 125
CCH Reference - 2007FED ¶7321
CCH Reference - 2007FED ¶7321B
CCH Reference - 2007FED ¶7322
CCH Reference - 2007FED ¶7323F
CCH Reference - 2007FED ¶7323G
CCH Reference - 2007FED ¶7323H
Tax Research Consultant
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