REMINDER: January 1, 2009 Proposed Effective Date for New Cafeteria Plan Regulations

• "Flex" plans, which allow participants to choose among a variety of qualified benefits;
• Premium-only plans, where the only choice is between cash and pre-tax contributions to a health plan;
• Medical flexible spending accounts, which reimburse out-of-pocket medical expenses;
• Dependent care flexible spending accounts, which reimburse the costs of caring for employees' dependents.

• Written Plan Document. The written plan document requirement is fleshed-out to require the document to include:
  • a description of the benefits available to participants;
  • a description of the eligibility provisions;
  • an explicit prohibition against participation by individuals who are not common law employees of the plan sponsor;
  • procedures for participants' elections among benefits;
  • procedures for making contributions through salary reduction or nonelective contributions;
  • a stated maximum contribution per employee; and
  • the plan year.

• Nondiscrimination Requirements. A plan can not favor highly compensated individuals with respect to eligibility, or favor highly compensated participants with respect to contributions or benefits. A key employee test also applies. The new proposed regulations clarify terms and establish a framework for performing the tests. Hopefully IRS will substantially improve the guidance on nondiscrimination testing when it issues final regulations.

• Flexible Spending Accounts. Notable changes include:
  • Advance Payment for Orthodontia Work. Cafeteria plans may not be used to defer compensation. However, orthodontists often request advance payment for services that will be rendered over a period that extends beyond the current plan year -- and durable medical equipment, such as wheelchairs, often have a useful life lasting beyond the year. The new proposed regulations directly address these expenses and provide that health FSAs may pay them.
  • Dependent Care Expenses incurred After Termination. Dependent Care FSAs can reimburse qualified dependent care expenses incurred after termination of employment.
  • Uniform Coverage Rule. Health FSAs will not violate the rule that the maximum reimbursement amount be available at all times by making reimbursements payable on a monthly basis (or shorter interval), or by establishing a "reasonable minimum amount" for reimbursements (not greater than $500).
  • New Adoption Assistance FSA. The new regulations introduce a third type of FSA, for adoption assistance. Adoption assistance FSAs must satisfy the IRC § 137 requirements for adoption assistance programs (i.e., the FSA may be used only to reimburse expenses that an employer could pay on an employee's behalf on a tax-favored basis pursuant to IRC § 137).
  • Experience Related Gains. A consequence of the use-or-lose rule is that FSAs may end up with a surplus at the end of a period of coverage. The new proposed regulations clarify that employers can retain these experience gains for their own use if they choose.

If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Tom Veal 312.946.2595, Deborah Walker 202.879.4955.

Copyright 2008, Deloitte.

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