Tax Treatment of Cafeteria Plans

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-243025-96]

RIN 1545-AU61

Tax Treatment of Cafeteria Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Partial withdrawal of notice of proposed rulemaking, amendment

to notice of proposed rulemaking, and notice of proposed rulemaking by

cross reference to temporary regulations.

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SUMMARY: This document withdraws portions of the notice of proposed

rulemaking published in the Federal Register (54 FR 9460) on March 7,

1989 and amends proposed regulations relating to changes in family

status. In the Rules and Regulations section of this issue of the

Federal Register, the IRS is issuing temporary regulations that provide

guidance on the circumstances under which a cafeteria plan participant

may revoke an existing election and make a new election during a period

of coverage. The text of those temporary regulations also serves as the

text of these proposed regulations.

DATES: Written comments and requests for a public hearing must be

received by February 5, 1998.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-243025-96), room

5226, Internal Revenue Service, POB 7604, Ben Franklin Station,

Washington, DC 20044. Submissions may be hand delivered between the

hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-243025-96), Courier's

Desk, Internal Revenue Service, 1111 Constitution Avenue NW,

Washington, DC. Alternatively, taxpayers may submit comments

electronically via the internet by selecting the ``Tax Regs'' option on

the IRS Home Page, or by submitting comments directly to the IRS

internet site at http://www.irs.ustreas.gov/prod/tax regs/

comments.html.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Sharon

Cohen, (202) 622-6080; concerning submissions or to request a public

hearing, Evangelista Lee, (202) 622-7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

Q&A-8 of Sec. 1.125-1 \1\ and Q&A-6(c) and (d) of Sec. 1.125-2 \2\

provide that a participant may make benefit election changes pursuant

to changes in family status and separation from service. The temporary

regulations set forth the standards under which a cafeteria plan can

allow an employee to change his or her health coverage election during

a period of coverage to conform with the special enrollment rights

under the Health Insurance Portability and Accountability Act of 1996,

and to change his or her health coverage or group-term life insurance

coverage in a variety of other ``change in status'' situations. Thus,

these proposed regulations modify Q&A-8 of Sec. 1.125-1 and Q&A-6(c)

and (d) of Sec. 1.125-2, and clarify that the ``change in family status

rules'' in the existing proposed regulations continue to apply to

qualified benefits (including dependent care assistance under section

129 and adoption assistance under section 137) other than accident or

health coverage and group-term life insurance coverage. Election

changes continue to be permitted where there has been a significant

change in the health coverage of the employee or spouse attributable to

the spouses's employment.

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\1\ Published as a proposed rule at 49 FR 19321 (May 7, 1984).

\2\ Published as a proposed rule at 54 FR 9460 (March 7, 1989).

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In addition, the temporary regulations provide that the rules of

section 401(k) and (m), rather than the rules in the temporary

regulations that apply to other qualified benefits, govern election

changes under a qualified cash or deferred arrangement (within the

meaning of section 401(k)) or with respect to employee contributions

under section 401(m). Therefore, the proposed regulations withdraw Q&A-

6(f) of Sec. 1.125-2.

Temporary regulations in the Rules and Regulations section of this

issue of the Federal Register amend the Income Tax Regulations (26 CFR

part 1) relating to section 125. The temporary regulations contain

rules relating to the circumstances under which a cafeteria plan

participant may revoke an existing election and make a new election

during a period of coverage.

The text of those temporary regulations also serves as the text of

these proposed regulations. The preamble to the temporary regulations

explains the temporary regulations.

Special Analyses

It has been determined that this Treasury Decision is not a

significant regulatory action as defined in EO 12866. Therefore, a

regulatory assessment is not required. It also has been determined that

section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)

do not apply to these regulations, and because the regulations do not

impose a collection of information on small entities, the Regulatory

Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to

section 7805(f) of the Internal Revenue Code, proposed regulations will

be submitted to the Chief Counsel for Advocacy of the Small Business

Administration for comment on their impact on small business.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations,

consideration will be given to any written comments (a signed original

and eight (8) copies) that are submitted timely to the IRS. All

comments will be available for public inspection and copying. A public

hearing may be scheduled if requested in writing by any

[[Page 60197]]

person that timely submits written comments. If a public hearing is

scheduled, notice of the date, time, and place for the hearing will be

published in the Federal Register.

Drafting Information

The principal authors of these regulations are Catherine Fuller and

Sharon Cohen, Office of the Associate Chief Counsel (Employee Benefits

and Exempt Organizations). However, other personnel from the IRS and

Treasury Department participated in their development.

Partial Withdrawal of Notice of Proposed Rulemaking

Accordingly, under the authority of 26 U.S.C. 7805, Sec. 1.125-2

Q&A-6(f) in the notice of proposed rulemaking that was published on

March 7, 1989 (54 FR 9460) is withdrawn.

List of Subjects in 26 CFR Part 1

Income taxes, reporting and recordkeeping requirements.

Amendments to Previously Proposed Rules

Accordingly, the proposed rules published on May 7, 1984 (49 FR

19321) and March 7, 1989 (54 FR 9460) are amended as follows:

PART 1--INCOME TAXES

Paragraph 1. In Sec. 1.125-1, as proposed May 7, 1984 (49 FR

19321), in Q&A-8, Q-8 is republished and A-8 is amended by revising the

last sentence to read as follows:

Sec. 1.125-1 Questions and answers relating to cafeteria plan.

* * * * *

Q-8: What requirements apply to participants' elections under a

cafeteria plan?

A-8: * * * However, except for benefit elections relating to

accident or health plans and group-term life insurance coverage, a

cafeteria plan may permit a participant to revoke a benefit election

after the period of coverage has commenced and to make a new election

with respect to the remainder of the period of coverage if both the

revocation and the new election are on account of and consistent with a

change in family status (e.g., marriage, divorce, death of spouse or

child, birth or adoption of child, and termination of employment of

spouse).

* * * * *

Par. 2. In Sec. 1.125-2, as proposed March 7, 1989 (54 FR 9460), in

Q&A-6, Q-6 is republished and A-6 is amended by revising A-6(c) and (d)

to read as follows:

Sec. 1.125-2 Miscellaneous cafeteria plan questions and answers.

* * * * *

Q-6: In what circumstance may participants revoke existing

elections and make new elections under a cafeteria plan?

A-6: * * *

(c) Certain Changes in Family Status. Except as otherwise provided,

in the case of benefits other than accident or health plan coverage and

group-term life insurance coverage, a cafeteria plan may permit a

participant to revoke a benefit election during a period of coverage

and to make a new election for the remaining portion of the period if

the revocation and new election are both on account of a change in

family status and are consistent with such change in family status. For

purposes of this paragraph (c) of Q&A-6, examples of changes in family

status for which a benefit election change may be permitted include the

marriage or divorce of the employee, the death of the employee's spouse

or a dependent, the birth or adoption of a child of the employee, the

termination of employment (or the commencement of employment) of the

employee's spouse, the switching from part-time to full-time employment

status or from full-time to part-time status by the employee or the

employee's spouse, and the taking of an unpaid leave of absence by the

employee or the employee's spouse. Benefit election changes are

consistent with family status changes only if the election changes are

necessary or appropriate as a result of the family status changes. In

the case of accident or health plans, election changes are permitted

where there has been a significant change in the health coverage of the

employee or spouse attributable to the spouse's employment. For

additional rules governing cafeteria plan election changes with respect

to accident or health plan coverage and group-term life insurance

coverage, see Sec. 1.125-1T.

(d) Separation from Service. Except with respect to accident or

health plan coverage and group-term life insurance coverage, a

cafeteria plan may permit an employee who separates from the service of

the employer during a period of coverage to revoke existing benefit

elections and terminate the receipt of benefits for the remaining

portion for the coverage period. The plan must prohibit the employee,

if the employee should return to service for the employer, from making

new benefit elections for the remaining portion of the period of

coverage. For rules governing cafeteria plan election changes with

respect to accident or health plan coverage and group-term life

insurance coverage, see Sec. 1.125-4T.

* * * * *

Proposed Amendments to the Regulations

In addition, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAX

Paragraph 1. The authority for part 1 continues to read in part as

follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.125-4 is added to read as follows:

[The text of this proposed section is the same as the text of

Sec. 1.125-4T published elsewhere in this issue of the Federal

Register.]

Michael P. Dolan,

Acting Commissioner of Internal Revenue.

[FR Doc. 97-29086 Filed 11-6-97; 8:45 am]

BILLING CODE 4830-01-U