Cafeteria Plan Regulations:
After many long years, the IRS has finally issued new proposed regulations updating the rules relating to cafeteria plans, i.e., plans that allow employees to choose between cash and certain tax-free benefits such as health insurance coverage, dependent care expense reimbursement, and group-term life insurance. The new regulations consolidate previously issued informal guidance and update the old rules to reflect common practices such as the use of debit cards to pay for benefits. Some of the highlights include explanation of the provisions required to be included in a written cafeteria plan document, the use of cafeteria plans to pay for individual health plans and COBRA premiums payable to a prior employer’s plan, and guidance on nondiscrimination testing. The regulations are not yet effective but employers may rely on them until final regulations are issued. The effect of these new regulations is to focus attention on plans that may have been running on auto-pilot for years. Now would be a good time to undertake a thorough compliance review of your cafeteria plan. See Treas. Prop. Reg. Sections 1.125-1, 1.125-2, 1.125-5, 1.125-6 and. 1.125-7.