Is Your Section 125 Plan Updated for the New IRS Regulations?

May 20th, 2008

The Internal Revenue Service (IRS) released proposed regulations on August 6, 2007 for Section 125 plans.  These proposed regulations consolidate and replace the majority of previously released temporary and proposed regulations affecting Section 125 plans, as well as providing additional clarification in certain areas.  The final regulations issued in 2001 pertaining to the effect of the FMLA on cafeteria plans (§1.125-3) and permitted election changes (§1.125-4) are unchanged by the new regulations. 

These new regulations are due to take effect for plan years beginning on or after January 1, 2009, although employers may rely on the new rules prior to their expected effective date.  Some of the changes and clarifications made by the new proposed regulations include:

  • Reinforcement that a written plan document is required to establish a plan
  • Guidance on the plan participation for former employees and dual-status individuals
  • Provision for an employee to pay for a prior employer’s COBRA premiums through the new employer’s cafeteria plan
  • Clarification that employees are allowed a 30-day window after hire date for elections, even if the benefit will be retroactive to the hire date
  • Extension of the rules for debit-card expense substantiation for dependent care FSAs
  • Guidance on required nondiscrimination testing timing and methodology

Since the regulations affect all employers that allow employees to pay for benefits on a pre-taxed basis, as well as both healthcare and dependent care flexible spending accounts, employers should audit their cafeteria plans to ensure compliance with these new requirements.  While the new regulations shouldn’t require significant changes to the administration or design of previously compliant plans, there could be some necessary updates or compliance issues to be addressed.  With the release of final regulations, employers may see an increase in the IRS’ focus on the compliance of Section 125 plans.

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