Revoke taxable benefit election in Cafeteria Plan?

[Guest trirod01]

A client has a cafeteria plan that has an option to purchase group term life insurance with after-tax dollars. Would an employee be able to revoke such an election part way through a plan year with no change of status event? I couldn't find anything that would allow that even if it was a benefit being paid for with after-tax dollars, but I wasn't sure if I might be missing something.

[J Simmons]

Barring someone being able to direct to authority directly on point and of which I am not aware, I do not think that you may permit it. Granted, it would be a mid-year change between two taxable benefits, the after-tax payment of life insurance premiums and additional cash pay. A choice between taxable benefits does not have to be made in the context of a 125 plan--it's taxable either way, so the choice itself would not render a tax-free benefit to be taxable.

But having made the after-tax payment of life insurance premiums an option under the cafeteria plan (it is a permissible taxable benefit--Prop Treas Reg § 1.125-1(a)(2)), then I think you have to follow the cafeteria plan election rules, including the general prohibition against mid-year changes unless incident to certain changes in family status.

As mentioned above, it would be a choice of two taxable benefits, not a choice across the taxability issue (i.e., not a choice between taxable and tax-free benefit) for which 125 compliance is necessary to keep those that choose the tax-free benefit from being taxed. Even though it is a choice on just once side of the taxability issue, the cafeteria plan rules would not permit an employee (sans a certain change in family status) to make mid-year change between two tax-free benefits. That is, an employee is not free mid-year to have the $250 a month being deducted for dental insurance premiums to be diverted to the payment of major medical insurance. So, I would reason, the employee is not free mid-year to switch between taxable benefits (after-tax payment of life insurance premiums to extra cash pay).

[Chaz]

If the Plan document provides for after-tax election changes, I don't think the Code will prevent them.