Comments Concerning Cafeteria Plan Regulations
Under Internal Revenue Code Section 125 III. Comments E. Comments on the Final 2000 Regulations and previously issued cafeteria plan regulations Although the Service is not formally seeking comments on the Final 2000 Regulations or any of the previously issued cafeteria plan regulations, the Service has informally suggested that it would consider comments on the Final 2000 Regulations and the previously issued cafeteria plan regulations since they form an integrated package and relate to each other. Consequently, this section briefly lists a few issues under the Final 2000 Regulations and previously issued cafeteria plan regulations that need clarification. This list is merely a brief statement of the most significant outstanding issues concerning cafeteria plans that require clarification. We would welcome an opportunity to prepare additional comments on these and other issues. - Is the list of changes in status events an exhaustive list or is it merely a safe harbor?
There are several practical issues that arise in administering cafeteria plans that are not addressed by the current change in status provisions: - Impact of Mergers, Acquisitions and Dispositions
- Explanation of Rule
Although the employment status event in the change in status rules of the Final 2000 Regulations was broadened, it nonetheless does not cover all types of mergers, acquisitions and dispositions. Hence, the cafeteria plan regulations need to be broadened to include a merger, divestiture or acquisition as a change in status event as long as the change in election does not result in any “subterfuge” to circumvent the change in status rules - Recommendation
The Regulations should specifically provide that transactions for which a change in election should be permitted include the following: - Events under Code §401(k)(10);
- Any purchase of a majority of the stock of a company or of a subsidiary or substantially all of the assets of a trade or business; and
- An acquisition of a new division in a merger or a stock or asset purchase.
In addition, it is recommended that instead of identifying all permissible corporate events, a change in election generally be allowed for any corporate transaction resulting in a new employer under Code §§414(b), (c), (m) or (o), except where to do so would be a subterfuge to avoid the general intent or purpose of the rules. In any case where a change in employer occurs, a change in election would typically be warranted as long as such change did not result in any subterfuge. Permitting such a change would give employers the ability to make benefit-related decisions solely based on business and human resources considerations. For example, in purchasing the assets of a division, buyer may assume seller’s medical program and/or cafeteria plan for the division employees to avoid a disruption in benefits. At the same time, buyer may wish to encourage employees to enter the HMO or PPO that buyer maintains for its other employees. Thus, buyer would like to allow employees to elect to either continue to receive medical benefits under the plan previously maintained by seller or to participate in a new program sponsored by buyer for buyer’s other employees. Allowing employees to change elections in this manner mid-year, due to the unanticipated corporate transaction, would not appear to violate the underlying objectives of the change in status rules (i.e., the limited exception from the constructive receipt rule). Also, the Service should provide guidance on whether an employee’s account balance in the seller’s FSA can be transferred to a new plan maintained by buyer. If not, how can employees use their account balances in the former employer’s FSA after the sale of the subsidiary is effective? The Service has informally taken the position that if buyer’s plan is identical to seller’s plan and was assumed by seller as part of the transaction, then the employee’s account balances can be transferred to buyer’s FSA. Otherwise, employees must continue to participate in their former employer’s FSA under COBRA in order to submit expenses that were incurred after the transaction became effective.
- Impact of change in employment status where eligibility conditions of a cafeteria plan do not depend on an employee’s employment status
- Explanation of Rule
The Service indicated in the preamble of the Final 2000 Regulations that it broadened the employment status provision in the change in status rules of the Final 2000 Regulations. The Final 2000 Regulations permit an employee to make an election change during a period of coverage if there is a change in the employee’s or dependent’s employment status that affects the individual’s eligibility under a cafeteria plan. Treas. Reg. §1.125-4(c)(2)(iii). It appears, however, that the employment status provision in the Final 2000 Regulations is not broader than the change in employment status provision under Q & A 6(c) of Prop. Treas. Regs. §§1.125-2 and 1.125-4. Under Q & A 6(c), an employee could elect to participate in the cafeteria plan during a period of coverage if the employee or his or her spouse switched from part-time to full-time employment (or vice versa), even if the employee was previously eligible to participate in the cafeteria plan. For example, a part-time employee who previously declined coverage under his employer’s health plan switches to full-time status in the middle of the year and wants to participate in his employer’s health plan because he can now afford the coverage. Under the Final 2000 Regulations, it appears that the employee could not make such an election until the enrollment period of the following plan year. - Recommendation
Expand the scope of the change in status rules to permit employee’s to make changes in their elections as a result of an change in their employment status or the employment status of their dependents, regardless of whether such individual becomes or ceases to become eligible to participate in the employer’s cafeteria plan as a result of the change in employment status.
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