Subject: BL-Newsletter: Bill Lieber Dies; New Cafeteria Plan IRS Regs Date: Fri, 7 Nov 1997 10:21:32 -0500 ................. BenefitsLink Newsletter ............. { { Free, useful information about U.S. tax and labor laws { and new Internet resources, for employee benefit plan { sponsors, service-providers and participants. ......................................................... ------------------------------------------------------------- WILLIAM M. LIEBER DIES We've lost one of the bright lights of the benefits community. Bill Lieber, author of Lieber on Pensions and former pension tax counsel on the Joint Committee on Taxation, died Wednesday morning of complications from surgery for lung cancer that was discovered only a few months ago. Bill was widely known as an "expert's expert" for his work in government in pension matters. He headed the Internal Revenue Service's ERISA drafting team and participated in writing all federal pension tax legislation from 1969 through 1985 -- bills on qualified plans, cafeteria plans, IRAs, SEPs and 457 plans. While at the IRS and later on the Joint Committee on Taxation, Lieber worked on provisions involving every aspect of pension plans and explained their provisions at hundreds of seminars for lawyers, CPAs, actuaries and administrators. His work also included provisions on ESOPs, governmental plans, church plans, multiemployer plans, top heavy plans, tax-sheltered annuities, survivor benefits, QDROs, age and service requirements, vesting and accrued benefits, integration with Social Security, unfunded plans, and deductions for qualified plans and VEBAs. He also taught deferred compensation as a Professorial Lecturer in Law at George Washington University's National Law Center. After taking early retirement from the government, Lieber worked intensely for years on the writing of his treatise, Lieber on Pensions, formerly published by Prentice-Hall. It is no longer available. He enjoyed a solo consulting practice in Columbia, Maryland for several years, and was one of the first consultants to make himself easily available via email. Questions submitted to his Compuserve address often resulted in improvements and clarifications in his treatise. A lawyer and CPA, he was a graduate of the University of Illinois and the University of Chicago Law School. Services were scheduled for today, November 7. ------------------------------------------------------------- IRS REGS ON CAFETERIA PLANS The full text of new IRS temporary regulations on cafeteria plans is available via the What's New page of BenefitsLink. (http://www.benefitslink.com) The regulations were published in the Federal Register of November 7. Here is an excerpt: Background This document contains amendments to the Income Tax Regulations (26 CFR part 1) under section 125. These temporary regulations provide guidance 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. Explanation of Provisions A "cafeteria plan" under section 125 allows an employee to choose between cash and certain nontaxable benefits, such as accident or health coverage. Section 125 generally permits the employee to choose the nontaxable benefit (rather than the available cash) without the employee having to include the available cash in gross income. The temporary regulations: -- Permit a cafeteria plan to allow an employee, during a plan year, to change his or her health coverage election to conform with the new special enrollment rights provided under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), and -- Permit a cafeteria plan to allow a change in coverage election for a variety of other changes in status. These regulations are designed to provide clear, administrable guidelines for determining when changes can be made in cafeteria plan elections during a plan year. These regulations are effective for plan years beginning after December 31, 1998. However, taxpayers may rely on the guidance in the temporary regulations (or on the existing proposed regulations) for prior periods. Summary Section 125 generally provides that an employee in a cafeteria plan will not have an amount included in gross income solely because the employee may choose among two or more benefits consisting of cash and "qualified benefits." A qualified benefit generally is any benefit that is excludable from gross income because of an express provision of the Code, including coverage under an employer-provided accident or health plan under sections 105 and 106, group-term life insurance under section 79, elective contributions under a qualified cash or deferred arrangement within the meaning of section 401(k), dependent care assistance under section 129, and adoption assistance under section 137. Under Secs. 1.125-1 and 1.125-2 of the existing proposed regulations, an employee is permitted to make an election between cash and qualified benefits before the beginning of the period of coverage (which generally is the plan year of the cafeteria plan); changes in the election during the plan year are permitted only in limited circumstances. The temporary regulations clarify the circumstances under which a cafeteria plan may permit an employee to change his or her cafeteria plan election with respect to accident or health coverage or group-term life insurance coverage during the plan year. Proposed regulations are also being published that cross-reference these temporary regulations, and that replace the change in family status provisions in Q&A-6 of proposed Sec. 1.125-2 with respect to accident or health plans and group-term life insurance. HIPAA Special Enrollment Rules The temporary regulations conform the cafeteria plan rules to the new special enrollment rights provided under HIPAA (which generally require group health plans to permit individuals to be enrolled for coverage following the loss of other health coverage, or if a person becomes the spouse or dependent of an employee through birth, marriage, adoption, or placement for adoption). Under the regulations, if an employee has a right to enroll in an employer's group health plan or to add coverage for a family member under HIPAA, the employee can make a conforming election under the cafeteria plan. This allows required contributions for such health coverage to be paid on a pre-tax basis. Changes in Status The temporary regulations include rules for other events, called "changes in status," under which a cafeteria plan may allow an employee to change his or her election during the plan year. The events that constitute changes in status under the regulations are changes in legal marital status, number of dependents, employment status, work schedule, and residence or worksite, and cases where the dependent satisfies or ceases to satisfy the requirements for unmarried dependents. The regulations permit a cafeteria plan to allow a change of election during the plan year if a change in status occurs that affects eligibility for coverage and the election change corresponds with the effect on eligibility. For example, if under the terms of an accident or health plan a child of an employee loses eligibility for coverage upon graduation from college, the cafeteria plan may allow the employee to cease payment for the child's coverage when the child graduates and coverage ceases. Certain of these changes in status (marriage, birth, adoption, and placement for adoption) overlap with the special enrollment events under HIPAA. The regulations include examples that clarify the relationship between HIPAA's special enrollment rights and these change in status rules. In addition, if a change in status occurs that entitles an employee or family member to "COBRA" continuation coverage (or coverage under a similar State program) with respect to the employer's plan, the regulations permit payments for the continuation coverage to be made on a pre-tax basis under a cafeteria plan. Other Events The regulations allow a corresponding cafeteria plan change if a plan receives a court order, such as a qualified medical child support order under section 609 of ERISA. In addition, if an employee, spouse, or dependent becomes entitled to Medicare or Medicaid, a cafeteria plan can permit a corresponding election change. Elective Contributions Under a Qualified Cash or Deferred Arrangement The temporary regulations, in provisions similar to those of the existing proposed regulations (proposed Sec. 1.125-2(f)), make clear that the rules of section 401(k) and (m), rather than the rules in these temporary regulations (which apply to other qualified benefits), govern changes in elections under a qualified cash or deferred arrangement (within the meaning of section 401(k)) or with respect to employee after-tax contributions subject to section 401(m). Scope of Temporary Regulations and Reliance on Proposed Regulations The temporary regulations do not address certain provisions concerning cafeteria plan election changes that are included in the existing proposed regulations. Guidance on these provisions is reserved at paragraphs (f)-(i) of the temporary regulations. For example, future guidance under the significant cost change provision (reserved at paragraph (g) of the temporary regulations), rather than the change in status rules, would determine whether an employee who switches from full-time to part-time employment and who remains eligible under the employer's health plan could make an election change if the part-time employee is required to pay significantly higher amounts for the coverage. The temporary regulations also reserve guidance with respect to provisions set forth in the existing proposed regulations that permit an election change in the case of a significant change in coverage (which includes a significant change in the health coverage of the employee or spouse attributable to the spouse's employment). Other matters not addressed in the temporary regulations include the application of the cafeteria plan election change rules to qualified benefits other than accident or health coverage and group-term life insurance coverage (for example, dependent care assistance programs), and special rules concerning changes in elections by employees taking leave under the Family and Medical Leave Act of 1993 (Pub. L. 103-3). Pending further guidance, taxpayers can continue to rely on the existing proposed regulations concerning these and other matters not addressed in the temporary regulations. The temporary regulations are effective for plan years beginning after December 31, 1998. Prior to that date, however, taxpayers can rely on the guidance provided in the temporary regulations (as well as on the guidance provided in the existing proposed regulations that relates to matters addressed in the temporary regulations) in order to comply with the provisions of section 125. ................. 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