NEWS RELEASE

November 15, 2007
PR-07/37
For additional information:
Jason Hammersla
202-289-6700

Council outlines employer concerns with IRS proposed cafeteria plan regulations

WASHINGTON, D.C. — "Our members view cafeteria plans as a valuable tool that allows them to provide employees an array of benefit options in a cost-effective manner," said Kathryn Wilber, American Benefits Council health policy legal counsel, prior to an Internal Revenue Service (IRS) hearing on the recently proposed regulations on cafeteria plans under Section 125 of the Internal Revenue Code. "We are hopeful that the proposed regulations will allow these plans to continue to provide value and flexibility for health plan participants."

The Council submitted a formal comment letter to IRS on November 5 outlining potential problems for employers. "Certain aspects of the proposed regulations raise significant concerns for the Council’s employer and service provider members, including the position on mistakes or errors in plan documents or in administration of a plan and the non-discrimination rules," Wilber said. "We believe that these rules should take into account that even the most diligent employers make inadvertent errors and omissions with respect to cafeteria plan documents and administration."

The Council’s comment letter recommended that the final regulations:

• provide where an employer in good faith adopts and maintains a cafeteria plan and corrects a plan document error within a reasonable time of discovery, the plan remains a cafeteria plan and will continue to be considered a cafeteria plan;
• provide an exception for de minimis operational errors, and should impose adverse tax consequences associated with more significant operational failures only upon affected participants;
• state that retroactive plan amendments are a permissible method of correction for cafeteria plans; and
• expand the Voluntary Correction Program (VCP) available under EPCRS in the qualified plan context for significant violations of Code § 125, the regulations or the cafeteria plan document, or create a similar voluntary correction program that cafeteria plan sponsors can use.

The Council also offered extensive recommendations for changes that should be made to the nondiscrimination section of the proposed regulations. Given their complexity, we urged that the new non-discrimination rules be revised and re-proposed to allow an opportunity for additional public comment. The comment letter also includes comments and recommendations regarding retroactive election, uniformity, exclusive means, coverage for non-dependents, payment or reimbursement of individual market accident and health plan premiums, salary reduction, deferred compensation, non-qualified benefits, flexible spending accounts, adoption expenses, dependent care assistance plans, and debit or stored value cards.

"When considering cafeteria plan issues, the IRS should remember that employers and service providers will need a sufficient amount of time to comply with final regulations," Dennett said. "The Council urges an effective date of plan years beginning two years after the publication date of final regulations, so that employers can continue to offer these valued arrangements."

The Council's full comment letter is available on the Council Web site. Wilber and Paul Dennett, Council vice president, health policy, are available to comment further on the letter and the proposed regulations. To arrange an interview, please contact Jason Hammersla, Council director, communications, at jhammersla@abcstaff.orgor by phone at (202) 289-6700.

The American Benefits Council is the national trade association for companies concerned about federal legislation and regulations affecting all aspects of the employee benefits system. The Council’s members represent the entire spectrum of the private employee benefits community and either sponsor directly or administer retirement and health plans covering more than 100 million Americans.