Comments Concerning Cafeteria Plan Regulations
Under Internal Revenue Code Section 125

III.  Comments

A.  Significant Cost or Coverage Changes

In Prop. Treas. Reg. §1.125-2, the Service permitted mid-year election changes as a result of significant cost or coverage changes in two limited circumstances. Automatic mid-year election changes were permitted if the cost of a health plan provided by an independent, third party provider increased or decreased. In addition, the Service permitted participants to change their premium payments or make prospective election changes if the premium amount under a health plan significantly increased. In the Proposed 2000 Regulations, the Service substantially revised the significant cost or coverage rules. We appreciate the added flexibility offered by the new rules. However, the Service should consider several issues concerning the Proposed 2000 Regulations, as described below.

1. Election Change Based on Change in Other Family Member’s Plan
    
2. 1. Explanation of New Rule

   2. During a period of coverage, a cafeteria plan may permit an employee to make a prospective election change that is on account of and corresponds with a change made under the plan of the spouse’s, former spouse’s, or dependent’s employer if: (i) a cafeteria plan or qualified benefits plan of the spouse’s, former spouse’s, or dependent’s employer permits participants to make an election change that would be permitted under the Proposed and Final 2000 Regulations; or (ii) the employee’s cafeteria plan permits participants to make an election for a period of coverage that is different from the period of coverage under the cafeteria plan or qualified benefits plan of the spouse’s, former spouse’s, or dependent’s employer. Prop. Treas. Reg. §1.125-4(f)(4). Similarly, the Final 2000 Regulations do not recognize relationships between domestic partners.

   3. Concerns

   4. Due to the recent and substantial increase in the number of employers offering benefits to domestic partners of employees, a greater number of individuals have the opportunity to receive their benefits through the plans of their domestic partners. Unless a domestic partner is a dependent under Section 152 of the Code, an event that would otherwise meet the requirements of the change in status rules would not constitute a change in status because the current change in status rules do not recognize relationships between domestic partners. Hence, an employer may permit the domestic partners of its employees to participate in the employer’s qualified benefits plans but such employees will not be eligible for the favorable tax treatment available under the Code.

   5. Recommendation

   6. We recommend that the Service expand this provision in the final regulations to permit an employee to make an election change that is on account of and corresponds with a change made under the plan of the spouse’s, former spouse’s, dependent’s or domestic partner’s employer.