Cafeteria Plans

January 08, 2025

3511 / What are the payment options that must be made available to employees on FMLA leave?

Editor's Note: The 2017 Tax Act created a new tax credit for employers that provide paid family and medical leave to employees. See Q <a href="javascript:void(0)"></a> for details. Whatever payment options are available to employees on non-FMLA leave must also be made available to employees on FMLA leave.<a href="#_ftn1">1</a> Employers must continue to contribute the same share of the premium cost that they were paying prior to the FMLA leave. Employees who choose to continue health coverage during an FMLA leave must pay the same portion of the cost of such coverage that they paid while actively at work.<a href="#_ftn2">2</a> Employers may choose to waive this requirement, provided that they do so on a nondiscriminatory basis. A cafeteria plan may generally offer employees on unpaid FMLA leave up to three options for paying for their health coverage under a cafeteria plan or health FSA.<a href="#_ftn3">3</a> These rules do not apply where paid leave is substituted for unpaid FMLA leave, in which case the employer must offer the payment method normally available during other types of paid leave.<a href="#_ftn4">4</a> Any of the three payment options discussed below may generally be made on a pre-tax salary reduction basis to the extent that the employee on FMLA leave has any taxable compensation (including the cash value of unused sick days or vacation days). A restriction applies when an employee's FMLA leave spans two plan years. In such a case, the plan may not operate in a manner that would allow employees on FMLA leave to defer compensation from one plan year to a subsequent plan year.<a href="#_ftn5">5</a> Any of the three payment options may also be made on an after-tax basis. A cafeteria plan may offer one or more of the following payment options, or a combination of these options, to an employee who continues group health plan coverage (including a health FSA) while on unpaid FMLA leave; provided that the payment options for employees on FMLA leave are offered on terms at least as favorable as those offered to employees not on FMLA leave. "Pre-pay" Option. Under this option, the employer allows the employee to pay the amounts due for the FMLA leave period prior to the commencement of FMLA leave.<a href="#_ftn6">6</a> Under no circumstances may the pre-pay option be the only option offered to employees on FMLA leave. The employer may offer the pre-pay option to employees on FMLA leave even if such option is not offered to employees on other types of unpaid leave.<a href="#_ftn7">7</a>"Pay-as-you-go" Option. Under this option, employees pay their portion of the health care costs according to a payment schedule. This schedule may be (1) the same as the schedule that would be in effect if they were not on FMLA leave; (2) the same schedule upon which COBRA payments would be made (see Q <a href="javascript:void(0)">368</a>); (3) the same schedule as applies to other employees on other, unpaid non-FMLA leave; or (4) any other schedule that (a) the employee and the employer voluntarily agree upon and (b) is not inconsistent with the regulations. The employer may not offer employees on FMLA leave only the pre-pay option and the catch-up option if the pay- as-you-go option is offered to employees on unpaid non-FMLA leave.<a href="#_ftn8">8</a>"Catch-up" Option. Under this option, an employer continues providing coverage during FMLA leave. The catch-up option may be the sole option offered by the employer only if it is the sole option offered to employees on unpaid non-FMLA leave.<a href="#_ftn9">9</a> In general, the employer and the employee must agree in advance that (1) coverage will continue during the FMLA leave, (2) the employer assumes responsibility for the payment of employee's portion of the health care costs during the FMLA leave, and (3) the employee will repay such amounts when he returns from FMLA leave. Planning Point: Many states have developed their own state-level paid family and medical leave programs (PFML programs). That raised questions over how these programs are treated for federal and employment tax purposes. The IRS clarified that employer contributions to state PFML programs are excluded from employees' income and not subject to FICA, FUTA or federal tax withholding. Employer contributions are treated as after-tax contributions. However, if the employer makes the employee's required contribution on their behalf, that contribution is included in the employee's compensation and subject to FICA, FUTA and federal tax withholding. When employees receive benefits under state PFML programs, they are treated as compensation to the extent they are designed to replace the employee's wages (unless the amounts qualify for exclusion based on the rules governing accident and health plans, meaning that they're paid for medical reasons). Importantly, the tax treatment of benefits will vary depending on whether they are paid for family or medical reasons.<a href="#_ftn10">10</a>Employer's Right of Recoupment. An employer is not required to continue the coverage of an employee on FMLA leave who fails to make the required premium payments when due. But if the employer does continue coverage, the employer is entitled to recoup the missed payments under the "catch-up" option, without the employee's prior agreement.<a href="#_ftn10">11</a>Health FSAs. Health FSAs are generally subject to the same payment rules as traditional cafeteria plans.<a href="#_ftn11">12</a> The regulations do not make clear whether the employer's right of recoupment, discussed above, applies to health FSAs. If so, it would appear to represent a significant departure from the general risk-shifting rule applicable to health FSAs. <hr align="left" size="1" width="33%"><a href="#_ftnref1">1</a>. Treas. Reg. § 1.125-3, A-3(b). <a href="#_ftnref2">2</a>. Treas. Reg. § 1.125-3, A-2. <a href="#_ftnref3">3</a>. Treas. Reg. § 1.125-3, A-3(a). <a href="#_ftnref4">4</a>. Treas. Reg. § 1.125-3, A-4. <a href="#_ftnref5">5</a>. Treas. Reg. § 1.125-3, A-5. <a href="#_ftnref6">6</a>. Treas. Reg. § 1.125-3(a)(1)(i). <a href="#_ftnref7">7</a>. Treas. Reg. § 1.125-3, A-3(b)(1). <a href="#_ftnref8">8</a>. Treas. Reg. § 1.125-3, A-3. <a href="#_ftnref9">9</a>. Treas. Reg. § 1.125-3, A-3. <a href="#_ftn10">10</a>. Rev. Rul. 2025-4.<a href="#_ftnref10">11</a>. Treas. Reg. § 1.125-3, A-3(a). <a href="#_ftnref11">12</a>. Treas. Reg. § 1.125-3, A-6(a)(1).

March 13, 2024

3515 / What is a flexible spending arrangement?

<div class="Section1">A flexible spending arrangement (FSA) is a program under IRC Section 125 under which incurred expenses may be reimbursed. This benefit may be provided as a stand-alone plan or as part of a traditional cafeteria plan. The most common types are health FSAs ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3516">3516</a>) and dependent care assistance FSAs ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3517">3517</a>).<div class="Section1"> In order for the coverage provided through an FSA to qualify for the exclusion from income under IRC Sections 105 and 106 or IRC Section 129 (for dependent care FSAs, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3625">3625</a>), the FSA must meet the requirements set forth in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3516">3516</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3517">3517</a>. </div></div>

March 13, 2024

3517 / What is a dependent care flexible spending arrangement?

Substantially the same rules apply to dependent care FSAs as health FSAs, except that the maximum amount of reimbursement need not be available throughout the period of coverage. A plan may limit a participant's reimbursement to amounts actually contributed to the plan and still available in the participant's account.<a href="#_ftn1">1</a> Contributions to a dependent care FSA may not exceed may not exceed $7,500 ($3,750 for married taxpayers filing separate returns) during a taxable year (prior to 2026, the limit was $5,000).<a href="#_ftn2">2</a><hr></hr> Planning Point: The rules governing changes to dependent care FSA contributions are more flexible than health FSAs. Employees are permitted to make mid-year changes in pre-tax contributions if their circumstances relating to the need for dependent care changes. Employees can reduce their contributions if they are working from home and do not need childcare, or they can increase the contributions when they return to work and need to provide for increased childcare costs. Employees who are furloughed or laid off might ask whether their plan contains a spend-down feature. These features are optional but allow former employees to seek reimbursement for dependent care expenses incurred through the end of the tax year (even if their employment was terminated). Employers have the option of adding a spend-down feature at any time.<hr></hr> Like a health FSA, a dependent care FSA may permit a grace period of no more than 2½ months following the end of the plan year for participants to incur and submit expenses for reimbursement.<a href="#_ftn3">3</a> The $500 carryover rule applicable for health FSAs after 2013, however, is not available for participants in a dependent care FSA. The IRS has also approved the use of employer-issued debit and credit cards to reimburse for recurring dependent care expenses. Because expenses may not be reimbursed until the dependent care services are provided, reimbursements through debit cards must flow in arrears of expenses incurred.<a href="#_ftn4">4</a>COVID-Era ReliefThe American Rescue Plan Act (ARPA) allowed employers to increase contribution limits for dependent care assistance programs (DCAPs) or dependent care FSAs to $10,500 for 2021. The 2021 CAA also allowed participants to carry over unused DCAP benefits from 2020 or 2021 into the following plan year. Initially, there was some confusion over the tax consequences if a participant took advantage of both the increased contribution limit and carryover relief. Notice 2021-26 clarified the issue by providing that participants could take advantage of both (1) tax-free reimbursements of contributions made during the 2021 plan year up to the maximum $10,500 limit and (2) tax-free reimbursements of amounts carried over from the prior year. In other words, a participant with a $5,000 carryover amount from 2020 and a $10,500 contribution in 2021 could take tax-free distributions up to $15,500 in 2021 if that participant incurred enough qualifying expenses during the 2021 plan year.<hr align="left" size="1" width="33%"></hr> <a href="#_ftnref1">1</a>. Prop. Treas. Reg. § 1.125-5. <a href="#_ftnref2">2</a>. IRC § 129(a)(2)(A). This limit is not currently adjusted for inflation. <a href="#_ftnref3">3</a>. Notice 2005-42, 2005-1 CB 1204. <a href="#_ftnref4">4</a>. Notice 2006-69, 2006-2 CB 107.

March 13, 2024

3516 / What is a health flexible spending arrangement?

<div class="Section1">Editor’s Note: Health FSAs typically operate under a “use it or lose it rule.” As participants know, FSA amounts not used by the end of a grace period following the year-end are typically forfeited. Plans are also permitted to allow a $660 (in 2025, $640 in 2024 and $610 in 2023) per-year carryover. Late in 2020, Congress enacted the CAA, which allowed amendments to health FSAs and dependent care FSAs to permit participants to carry over any unused amounts from the 2020 plan year into the 2021 plan year. FSAs with plan years ending in 2021 were similarly permitted to allow participants to carry over all unused amounts into plan years ending in 2022. If the plan already had a grace period in place, the grace period could be extended to 12 months after the end of the plan year. Relatedly, FSAs were permitted to allow employees who stopped participating in the FSA during 2020 or 2021 to continue receiving amounts from the FSA through the end of the year in which the employee stopped participating (including any grace periods and extended grace periods).<div class="Section1"> Although health coverage under an FSA need not be provided under commercial insurance, it must demonstrate the risk shifting and risk distribution characteristics of insurance. Reimbursements under a health FSA must be paid specifically to reimburse medical expenses that have been incurred previously. A health FSA cannot operate so as to provide coverage only for periods during which the participants expect to incur medical expenses, if such period is shorter than a plan year. In addition, the maximum amount of reimbursement must be available at all times throughout the period of coverage (properly reduced for prior reimbursements for the same period of coverage), without regard to the extent to which the participant has paid the required premiums for the coverage period, and without a premium payment schedule based on the rate or amount of covered claims incurred in the coverage period.<a href="#_ftn1" name="_ftnref1">1</a> Before 2013, there was no statutory limit on contributions to a health FSA, but most employers imposed a limit to protect themselves against large claims that had not yet been funded by salary reductions. The period of coverage must be 12 months, or in the case of a short first plan year, the entire first year (or the short plan year where the plan year is changed). Election changes may not be permitted to increase or decrease coverage during a coverage year, but prospective changes may be allowed if they are consistent with certain changes in family status. See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3506">3506</a>. The plan may permit the period of coverage to be terminated if the employee fails to pay premiums, provided that the terms of the plan prohibit the employee from making a new election during the remaining period of coverage. The plan may permit revocation of existing elections by an employee who terminated service.<a href="#_ftn2" name="_ftnref2">2</a> A plan may provide a grace period of no more than 2½ months following the end of the plan year for participants to incur and submit expenses for reimbursement. The grace period must apply to all participants in the plan. Plans may adopt a grace period for the current plan year by amending the plan document before the end of the current plan year.<a href="#_ftn3" name="_ftnref3">3</a> Further, beginning in 2014, health FSAs may be amended so that $500 of each participant’s unused amounts remaining at the end of the plan year may be carried forward to the next plan year. However, plans that incorporate the carryover provision may not also offer the 2½ month grace period.<a href="#_ftn4" name="_ftnref4">4</a> In 2020, the IRS clarified that the amount that may be carried forward will be inflation-adjusted, so that the amount that can be carried over to the following year from a health FSA will equal 20 percent of the maximum inflation-indexed salary reduction amount under Section 125 (increasing the carryover amount to $660 in 2025, $640 in 2024, $610 for 2023).<a href="#_ftn5" name="_ftnref5">5</a> This change, while enacted in the wake of the COVID-19 pandemic, is permanent. <hr> Planning Point: The IRS has released guidance clarifying application of the carryover provision. The IRS guidance has made clear that, unlike health savings accounts (HSAs) or health reimbursement arrangements (HRAs), the FSA cannot allow the participant to accumulate funds from year to year. The carryover applies only to the single year that immediately follows the year of contribution.<a href="#_ftn6" name="_ftnref6">6</a> <hr> The plan may reimburse medical expenses of the kind described under IRC Section 213(d), but may not reimburse for premiums paid for other health plan coverage.<a href="#_ftn7" name="_ftnref7">7</a> Editor’s Note: Under current law, the plan can reimburse for nonprescription over- the-counter drugs.<a href="#_ftn8" name="_ftnref8">8</a> However, for taxable years beginning after December 31, 2010 and before March 2020, reimbursements for medicine were limited to doctor-prescribed drugs and insulin. That requirement was repealed by the 2020 CARES Act in the wake of the COVID-19 pandemic.<a href="#_ftn9" name="_ftnref9">9</a> The medical expenses must be for medical care provided during the period of coverage with substantiation that the expense claimed has been incurred and is not reimbursable under other health coverage.<a href="#_ftn10" name="_ftnref10">10</a> <hr> Planning Point: Employees should remember that health expenses are deemed to be “incurred” when the service is actually provided--not when the employee is billed. <hr> The IRS has approved the use of employer-issued debit and credit cards to pay for medical expenses as incurred, provided that the employer requires subsequent substantiation of the expenses or has in place sufficient procedures to substantiate the payments at the time of purchase.<a href="#_ftn11" name="_ftnref11">11</a> On a one-time basis, a plan may allow a qualified HSA distribution. See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="413">413</a>. Employer-provided coverage for qualified long-term care services provided through an FSA is included in the employee’s gross income.<a href="#_ftn12" name="_ftnref12">12</a> Informal IRS Guidance on FSAs. In August of 2001, the IRS provided informal, nonbinding guidance regarding FSAs. In a departure from previous informal guidance, the IRS indicated that orthodontia expenses should be treated differently from other medical expenses. Under this reasoning, if orthodontia expenses are paid in a lump sum when treatment commences, rather than over the course of treatment, they could be reimbursed under an FSA when paid. Finally, the IRS informally clarified that there is no de minimis claim amount that need not be substantiated; employers and plan administrators may not disregard the substantiation requirements for small claims. </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.       Prop. Treas. Reg. § 1.125-5(d). <a href="#_ftnref2" name="_ftn2">2</a>.       Prop. Treas. Reg. § 1.125-5(e). <a href="#_ftnref3" name="_ftn3">3</a>.       Prop. Treas. Reg. § 1.125-1(e); Notice 2005-42, 2005-1 CB 1204. <a href="#_ftnref4" name="_ftn4">4</a>.       Notice 2013-71, 2013-47 IRB 532. <a href="#_ftnref5" name="_ftn5">5</a>.       Notice 2022-55, Notice 2023-34, Notice 2024-40. <a href="#_ftnref6" name="_ftn6">6</a>.       IRS INFO 2018-0012. <a href="#_ftnref7" name="_ftn7">7</a>.       Prop. Treas. Reg. § 1.125-5(k). <a href="#_ftnref8" name="_ftn8">8</a>.       Rev. Rul. 2003-102, 2003-2 CB 559. <a href="#_ftnref9" name="_ftn9">9</a>.       IRC § 106(f), as added by ACA 2010. <a href="#_ftnref10" name="_ftn10">10</a>.     Prop. Treas. Reg. § 1.125-6(b); Rev. Proc. 2003-43, 2003-1 CB 935. See Grande v. Allison Engine Co., 2000 U.S Dist. LEXIS 12220 (S.D. Ind. 2000). <a href="#_ftnref11" name="_ftn11">11</a>.     Notice 2006-69, 2006-2 CB 107. See also Notice 2007-2, 2007-1 CB 254. <a href="#_ftnref12" name="_ftn12">12</a>.     IRC § 106(c)(1). </div></div>

March 13, 2024

3518 / How are gains or income from a flexible spending arrangement treated?

<div class="Section1">Any gain or income from an FSA may be (1) used to reduce premiums for the following year; or (2) returned to the premium payors as dividends or premium refunds on a reasonable basis, but in no case based on their individual claims experience.<a href="#_ftn1" name="_ftnref1">1</a></div> <div class="Section1"> The maximum amount of reimbursement for a period of coverage under an FSA may not be substantially in excess of the total "premium" for the coverage. The maximum amount of reimbursement is not considered to be substantially in excess of the total premium if the maximum amount is less than 500 percent of the premium. This definition is applicable to plan years beginning after December 31, 1989.<a href="#_ftn2" name="_ftnref2">2</a> Since 2013, there are two possible plan options for a participant with unspent funds in a health FSA. The plan may (1) allow for a carryover of up to $500 to the next year, but forfeit amounts in excess of $500 ($660 in 2025, $640 in 2024 and $610 in 2023) at year end; or (2) allow for a grace period giving participants up to an additional 2½ months (through March 15) to spend the unused funds, but forfeit any remaining at the end of the grace period. The employer can offer either option, but not both. Or it can offer neither option resulting in forfeiture of all unspent funds at end of year. </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. Prop. Treas. Reg. § 1.125-5(o). <a href="#_ftnref2" name="_ftn2">2</a>. Prop. Treas. Reg. § 1.125-5(a). </div>

March 13, 2024

3510 / How are non-health-related benefits offered under a cafeteria plan affected by the Family and Medical Leave Act?

<div class="Section1">Under both the proposed and final regulations, employers are not required to continue an employees' non-health benefits provided under a cafeteria plan (e.g., life insurance) during an FMLA leave. Rather, whether an employee is entitled to the continuation of non-health benefits must be decided under the employer's policy applicable to employees on non-FMLA leave.<a href="#_ftn1" name="_ftnref1">1</a></div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. Treas. Reg. § 1.125-3, A-7. </div>

March 13, 2024

3513 / Are amounts received under a cafeteria plan subject to Social Security and federal unemployment taxes?

<div class="Section1">Amounts received by participants, or their beneficiaries, under a cafeteria plan are not treated as wages. Thus, these amounts are not subject to tax under the Federal Insurance Contributions Act (FICA) or under the Federal Unemployment Tax Act (FUTA) if such payments would not be treated as wages without regard to the plan, and if it is reasonable to believe that IRC Section 125 would not treat any wages as constructively received.<a href="#_ftn1" name="_ftnref1">1</a></div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC §§ 3121(a)(5)(G), 3306(b)(5)(G). </div>

March 13, 2024

3511 / What are the payment options that must be made available to employees on FMLA leave?

<div class="Section1">Editor’s Note: The 2017 Tax Act created a new tax credit for employers that provide paid family and medical leave to employees. See Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> for details.<div class="Section1"> Whatever payment options are available to employees on non-FMLA leave must also be made available to employees on FMLA leave.<a href="#_ftn1" name="_ftnref1">1</a> Employers must continue to contribute the same share of the premium cost that they were paying prior to the FMLA leave. Employees who choose to continue health coverage during an FMLA leave must pay the same portion of the cost of such coverage that they paid while actively at work.<a href="#_ftn2" name="_ftnref2">2</a> Employers may choose to waive this requirement, provided that they do so on a nondiscriminatory basis. A cafeteria plan may generally offer employees on unpaid FMLA leave up to three options for paying for their health coverage under a cafeteria plan or health FSA.<a href="#_ftn3" name="_ftnref3">3</a> These rules do not apply where paid leave is substituted for unpaid FMLA leave, in which case the employer must offer the payment method normally available during other types of paid leave.<a href="#_ftn4" name="_ftnref4">4</a> Any of the three payment options discussed below may generally be made on a pre-tax salary reduction basis to the extent that the employee on FMLA leave has any taxable compensation (including the cash value of unused sick days or vacation days). A restriction applies when an employee’s FMLA leave spans two plan years. In such a case, the plan may not operate in a manner that would allow employees on FMLA leave to defer compensation from one plan year to a subsequent plan year.<a href="#_ftn5" name="_ftnref5">5</a> Any of the three payment options may also be made on an after-tax basis. A cafeteria plan may offer one or more of the following payment options, or a combination of these options, to an employee who continues group health plan coverage (including a health FSA) while on unpaid FMLA leave; provided that the payment options for employees on FMLA leave are offered on terms at least as favorable as those offered to employees not on FMLA leave. “Pre-pay” Option. Under this option, the employer allows the employee to pay the amounts due for the FMLA leave period prior to the commencement of FMLA leave.<a href="#_ftn6" name="_ftnref6">6</a> Under no circumstances may the pre-pay option be the only option offered to employees on FMLA leave. The employer may offer the pre-pay option to employees on FMLA leave even if such option is not offered to employees on other types of unpaid leave.<a href="#_ftn7" name="_ftnref7">7</a> “Pay-as-you-go” Option. Under this option, employees pay their portion of the health care costs according to a payment schedule. This schedule may be (1) the same as the schedule that would be in effect if they were not on FMLA leave; (2) the same schedule upon which COBRA payments would be made (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="368">368</a>); (3) the same schedule as applies to other employees on other, unpaid non-FMLA leave; or (4) any other schedule that (a) the employee and the employer voluntarily agree upon and (b) is not inconsistent with the regulations. The employer may not offer employees on FMLA leave only the pre-pay option and the catch-up option if the pay- as-you-go option is offered to employees on unpaid non-FMLA leave.<a href="#_ftn8" name="_ftnref8">8</a> “Catch-up” Option. Under this option, an employer continues providing coverage during FMLA leave. The catch-up option may be the sole option offered by the employer only if it is the sole option offered to employees on unpaid non-FMLA leave.<a href="#_ftn9" name="_ftnref9">9</a> In general, the employer and the employee must agree in advance that (1) coverage will continue during the FMLA leave, (2) the employer assumes responsibility for the payment of employee’s portion of the health care costs during the FMLA leave, and (3) the employee will repay such amounts when he returns from FMLA leave. Employer’s Right of Recoupment. An employer is not required to continue the coverage of an employee on FMLA leave who fails to make the required premium payments when due. But if the employer does continue coverage, the employer is entitled to recoup the missed payments under the “catch-up” option, without the employee’s prior agreement.<a href="#_ftn10" name="_ftnref10">10</a> Health FSAs. Health FSAs are generally subject to the same payment rules as traditional cafeteria plans.<a href="#_ftn11" name="_ftnref11">11</a> The regulations do not make clear whether the employer’s right of recoupment, discussed above, applies to health FSAs. If so, it would appear to represent a significant departure from the general risk-shifting rule applicable to health FSAs. </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.       Treas. Reg. § 1.125-3, A-3(b). <a href="#_ftnref2" name="_ftn2">2</a>.       Treas. Reg. § 1.125-3, A-2. <a href="#_ftnref3" name="_ftn3">3</a>.       Treas. Reg. § 1.125-3, A-3(a). <a href="#_ftnref4" name="_ftn4">4</a>.       Treas. Reg. § 1.125-3, A-4. <a href="#_ftnref5" name="_ftn5">5</a>.       Treas. Reg. § 1.125-3, A-5. <a href="#_ftnref6" name="_ftn6">6</a>.       Treas. Reg. § 1.125-3(a)(1)(i). <a href="#_ftnref7" name="_ftn7">7</a>.       Treas. Reg. § 1.125-3, A-3(b)(1). <a href="#_ftnref8" name="_ftn8">8</a>.       Treas. Reg. § 1.125-3, A-3. <a href="#_ftnref9" name="_ftn9">9</a>.       Treas. Reg. § 1.125-3, A-3. <a href="#_ftnref10" name="_ftn10">10</a>.     Treas. Reg. § 1.125-3, A-3(a). <a href="#_ftnref11" name="_ftn11">11</a>.     Treas. Reg. § 1.125-3, A-6(a)(1). </div></div>

March 13, 2024

3514 / Must an employer sponsoring a cafeteria plan file an information return with the IRS?

<div class="Section1">Under IRC Section 6039D, an employer sponsoring a cafeteria plan was required to file an information return with the IRS. This return indicated the number of the employer's employees, the number of employees eligible to participate in the plan, the number of employees actually participating in the plan, the cost of the plan, the identity of the employer, the type of business in which it is engaged, and the number of its highly compensated employees in the above categories.</div> <div class="Section1"> Under prior law, all employers that maintained cafeteria plans were required to file an information return (Form 5500 series with Schedule F) for each year.<a href="#_ftn1" name="_ftnref1">1</a> However, the IRS has currently suspended the operation of these reporting requirements with respect to cafeteria plans.<a href="#_ftn2" name="_ftnref2">2</a> This suspension is in effect for plan years beginning prior to the issuance of further guidance from the IRS. Proposed Form 5500 regulations released in July 2016 would require plans that provide group health benefits to provide information on whether health plan funding and benefit arrangements are through a health insurance issuer and whether benefits are paid through a trust or from the employer's general assets. Further, Schedule J to Form 5500 would require these plans to disclose whether there were participant and/or employer contributions. "Participant contributions" include all elective contributions made under a cafeteria plan.<a href="#_ftn3" name="_ftnref3">3</a> The proposed regulations would not require welfare benefit plans (including cafeteria plans) to file Form 5500 if the plan (1) does not provide health benefits, (2) covers fewer than 100 participants and (3) is unfunded, fully insured or a combination of insured and unfunded (unfunded plans have benefits paid directly from the general assets of the employer or sponsoring employee organization). If the plan receives participant contributions, it is funded.<a href="#_ftn4" name="_ftnref4">4</a> Despite this, a cafeteria plan may be treated as though it is unfunded if it meets the requirements of DOL Technical Release 92-01, 57 FR 23272 (June 2, 1992) and 58 FR 45359 (Aug. 27, 1993). The IRS action does not affect annual reporting requirements under Title I of ERISA, or relieve administrators of employee benefit plans from any obligation to file a Form 5500 and any required schedules (other than the Schedule F) under that title. However, many practitioners believe that, under ERISA and the new proposed Form 5500 regulations, cafeteria plans containing Health FSAs with more than 100 participants are required to file Forms 5500 because the FSA is a welfare benefit that provides health benefits. And because the IRS Section 6039D suspension does not affect ERISA filing requirements, such cafeteria plans are therefore required to file. </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. IRS Office of Chief Counsel Training Manual No. 4213-018 (Rev. 5/98). <a href="#_ftnref2" name="_ftn2">2</a>. Notice 2002-24, 2002-1 CB 785. <a href="#_ftnref3" name="_ftn3">3</a>. Proposed Revision of Annual Information Return/Reports, RIN 1210-AB63, p96. <a href="#_ftnref4" name="_ftn4">4</a>. Appendix B to Instructions for Form 5500 Annual Return/Report of Employee Benefit Plan, p. 314. </div>

March 13, 2024

3506 / When can benefit elections under a cafeteria plan be changed?

<div class="Section1">Editor’s Note: IRS Notice 2022-41 changed the rules governing mid-year election changes and cafeteria plans in light of the final regulations that fixed the so-called “family glitch” under the ACA.   Typically, employees are not permitted to change the family coverage election mid-year.  Beginning January 1, 2023, however, a non-calendar year cafeteria plan may allow an employee to revoke an election for family coverage so that family members can enroll in ACA marketplace coverage if both of the following are true: (1) one or more of the employee’s family members are eligible to enroll in marketplace coverage during a special enrollment period or during Marketplace annual open enrollment, and (2) revoking the employee’s family coverage election corresponds with the intended enrollment of the family member in a marketplace plan.<div class="Section1"> The IRS provided relief to permit certain mid-year election changes in the wake of the COVID-19 pandemic. For mid-year elections made during calendar year 2020 or 2021, a Section 125 cafeteria plan could permit employees who are eligible to make salary reduction contributions under the plan to: <blockquote>(1)     with respect to employer-sponsored health coverage, (a) make a new election on a prospective basis, if the employee initially declined to elect employer-sponsored health coverage; (b) revoke an existing election and make a new election to enroll in different health coverage sponsored by the same employer on a prospective basis; and (c) revoke an existing election on a prospective basis, provided that the employee confirms in writing that the employee is enrolled, or immediately will enroll, in other health coverage not sponsored by the employer; and (2)     revoke an election, make a new election, or decrease or increase an existing election applicable to a health FSA or dependent care assistance program on a prospective basis.</blockquote> If an employee had unused amounts remaining in a health FSA or a dependent care assistance program under the cafeteria plan at the end of a grace period or plan year ending in 2020 or 2021, the cafeteria plan could permit employees to apply those unused amounts to pay or reimburse medical care expenses or dependent care expenses incurred through 2021 or 2022, as applicable.<a href="#_ftn1" name="_ftnref1">1</a> This relief was optional for employers.<a href="#_ftn2" name="_ftnref2">2</a> Typically, there are only certain instances when a cafeteria plan may permit an employee to revoke an election during a period of coverage and to make a new election relating to a qualified benefits plan.<a href="#_ftn3" name="_ftnref3">3</a> A cafeteria plan may permit an employee to revoke an election for coverage under a group health plan during a period of coverage and make a new election that corresponds with the special enrollment rights of IRC Section 9801(f). (This section deals generally with special enrollment periods for persons losing other group health plan coverage and dependent beneficiaries.)<a href="#_ftn4" name="_ftnref4">4</a> An election change with respect to the Section 9801(f) enrollment rights can be funded through salary reduction under a cafeteria plan only on a prospective basis, except for the retroactive enrollment right under Section 9801(f) that applies in the case of elections made within 30 days of a birth, adoption, or placement for adoption.<a href="#_ftn5" name="_ftnref5">5</a> Certain changes are permitted with respect to a judgment, decree, or order resulting from a divorce, legal separation, annulment, or change in legal custody (including a qualified medical child support order) that requires accident or health coverage for an employee’s child or for a foster child who is a dependent of the employee. A cafeteria plan may change the employee’s election to provide coverage for the child if an order requires coverage for the child under the employer’s plan. Also, the plan may permit the employee to make an election change to cancel coverage for the child if an order requires the spouse, former spouse, or other individual to provide coverage for the child and that coverage actually is provided.<a href="#_ftn6" name="_ftnref6">6</a> Additionally, if an employee, spouse, or dependent who is enrolled in the employer’s accident or health plan becomes entitled to coverage (i.e., becomes enrolled) under Medicaid or Part A or Part B of Medicare, the plan may permit the employee to make a prospective election change to reduce or cancel coverage of that employee, spouse, or dependent under the accident or health plan. Note that this does not apply to coverage consisting solely of benefits under the Social Security Act Section 1928 program for distribution of pediatric vaccines. If an employee, spouse, or dependent that has been entitled to Medicaid or Medicare Part A or Part B coverage loses eligibility for the coverage, the plan may allow the employee to make a prospective election to commence or increase coverage of that employee, spouse, or dependent under the accident or health plan.<a href="#_ftn7" name="_ftnref7">7</a> An employee taking a leave under the Family and Medical Leave Act (FMLA) may revoke an existing election of accident or health plan coverage and make such election as provided for under the FMLA for the remaining portion of the period of coverage ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3509">3509</a>).<a href="#_ftn8" name="_ftnref8">8</a> Regarding contributions under a qualified cash or deferred arrangement, the regulations state that these provisions do not apply to elective contributions under such an arrangement, within the meaning of IRC Section 401(k), or employee contributions subject to IRC Section 401(m). Therefore, a cafeteria plan may allow an employee to modify or revoke elections as provided by these sections and applicable regulations.<a href="#_ftn9" name="_ftnref9">9</a> If a cafeteria plan offers salary reduction contributions to health savings accounts (HSAs), the plan must allow participants to prospectively change or revoke salary reduction elections for HSA contributions on a monthly, or more frequent, basis.<a href="#_ftn10" name="_ftnref10">10</a> </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.       Notice 2020-29. <a href="#_ftnref2" name="_ftn2">2</a>.       Notice 2021-15. <a href="#_ftnref3" name="_ftn3">3</a>.       Treas. Reg. § 1.125-4(a). <a href="#_ftnref4" name="_ftn4">4</a>.       Treas. Reg. § 1.125-4(b). <a href="#_ftnref5" name="_ftn5">5</a>.       Treas. Reg. § 1.125-4(b)(2). <a href="#_ftnref6" name="_ftn6">6</a>.       Treas. Reg. § 1.125-4(d). <a href="#_ftnref7" name="_ftn7">7</a>.       Treas. Reg. § 1.125-4(e). <a href="#_ftnref8" name="_ftn8">8</a>.       Treas. Reg. § 1.125-4(g). <a href="#_ftnref9" name="_ftn9">9</a>.       Treas. Reg. § 1.125-4(h). <a href="#_ftnref10" name="_ftn10">10</a>.     Prop. Treas. Reg. § 1.125-2(c). </div></div>