improper operation

[Guest RBeck]

What happens to a cafeteria plan that is not operated properly, that is, a plan in which medical expenses are reimbursed to participants only as the amounts are received by the plan?

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RB

[Joe Priselac]

RB,

If a Cafeteria Plan offers a non qualified benefit, it can be disqualified and therefore any pretax salary reductions or reimbursements could become taxable income.

[Guest RBeck]

Thanks, Joe! A few more questions - one of the tax people I work with insists that the Section 125 regs are proposed, and therefore compliance is voluntary. Any comments/suggestions?

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RB

[Lisa Hand]

RB-

Not only is there one set of temporary regulations but also there are five sets of proposed regulations which govern Section 125 Plans. The IRS will follow all of them in auditing a plan, this means that employers must follow such regualtions, even though they are not issued in final form.

[Guest RLewis]

You are required to follow the law. Proposed regs are an proposed agency (in this case, the IRS) interpretation of laws passed by Congress. The agency will apply their interpretation in making a decision as to whether you have followed the law. Compliance with proposed regs is voluntary, but if you do not comply, be prepared to do battle with the agency. On the other hand, if you do fully comply, you generally have, in effect, a safe harbor, even if the final regs turn out to be different than the proposed regs.

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RAL

[Christine Roberts]

Is disqualification of an entire plan the result if a plan sponsor allows an election change due to something that is definitely not a "change in family status," or would the consequences simply be inclusion of the deferred amounts in the affected participant's income?