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IRS Proposes Comprehensive Cafeteria Plan Regulations

    Client Alerts
  • August 10, 2007

Late last week, the IRS released long-awaited proposed regulations on cafeteria plans, including numerous changes and clarifications, just a few of which are highlighted below.  The proposed regulations replace six separate sets of proposed and temporary regulations dating back to 1984, and generally are not expected to be effective until 2009.  However, employers may rely on them for guidance pending issuance of final regulations.  Once effective, final regulations will require significantly greater diligence on the part of employers with respect to compliant documentation and operation of their cafeteria plans.


Key aspects of the proposed regulations include:


  • Reemphasizing that cafeteria plans are the sole means by which employers may allow employees to choose between taxable benefits (mainly in the form of cash) and non-taxable benefits (e.g., medical insurance).
  • Reemphasizing that a cafeteria plan must be set forth in a written document that is adopted before benefits are provided.
  • Setting forth ten specific terms that must be included in a cafeteria plan document, including each available benefit, eligibility and participation rules, election procedures, contribution sources and limitations, and flexible spending account (“FSA”) rules, if FSAs are included.
  • Updating permissible benefits, including accident and health plans, health FSAs, dependent care assistance plans, adoption assistance plans, HSA contributions, and reimbursement of substantiated individual health insurance premiums and employee COBRA premiums.
  • Clarifying benefits that may not be offered through a cafeteria plan, including scholarships, educational assistance, fringe benefits, long-term care insurance, contributions to Archer Medical Savings Accounts, and group-term life insurance for an employee’s spouse, child or dependent.
  • Affirming that cafeteria plans may have automatic elections, and that new employees’ elections may be retroactive to date of hire if made within 30 days of hire, though salary reductions to provide benefits must come from compensation not yet available as of the date of the election.
  • Confirming that new election, revocations and changes in elections may be made electronically.
  • Generally allowing employers to reimburse terminated employees under a dependent care FSA for qualified dependent care expenses incurred after termination.
  • Modifying and expanding the cafeteria plan nondiscrimination rules, including providing an objective test for determining when the actual election of benefits is discriminatory, which may require annual review to assure that highly compensated participants are not utilizing benefits in a discriminatory manner.


This is only a brief overview of some key features of the proposed regulations.  A hearing on the proposed regulations is scheduled for November 15, 2007, and hopefully final regulations will be released early in 2008 in order for there to be adequate time to prepare for implementation in 2009.