Comments Concerning Cafeteria Plan Regulations
Under Internal Revenue Code Section 125

III.  Comments

A.  Significant Cost or Coverage Changes

5. Definition of “Significant”
    
6. 1. Explanation of New Rule

   2. A number of provisions in the section of the Proposed 2000 Regulations regarding significant cost or coverage changes require a “significant” change in order to permit the employee to make an election change. For example, changes may be made on account of “significant cost increases” or a “significant curtailment” of coverage. Prop. Treas. Reg. §1.125-4(f).

   3. Concerns

   4. The Proposed 2000 Regulations do not contain a definition of “significant” (other than in Example 7 where a ten percent (10%) increase in dependent care cost was significant). Consequently, a plan administrator must use its discretion in interpreting such language.

      The Service has informally stated that although the establishment of any bright-line dollar amount or a percentage may facilitate plan administration, it could not apply evenly to all participants. An increase in cost is more significant for lower-paid workers than for higher-paid workers. Further, any dollar amount would have to be continually updated for inflation. Although we agree with the Service, employers desire some guidance in order to apply the rules regarding significant cost or coverage changes.

   5. Recommendation

   6. We recommend that, when finalized, the Proposed 2000 Regulations define the word “significant” to require the use of uniform and objective standards taking into account each participant’s individual circumstances. Adding this guidance to the Proposed 2000 Regulations should not result in an abuse of the permitted election rules.