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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
The IRS has released proposed cafeteria plan regulations that incorporate legislative changes since previous proposed regulations were drafted and clarify prior rules under Code Sec. 125 . The proposed regulations also consolidate and withdraw five prior proposed regulations under Code Sec. 125.
The rules contained in the new proposed regulations are substantially unchanged from the withdrawn proposed regulations, with only minor changes to reflect legislation and for clarification. The withdrawn proposed regulations were organized in question-and-answer format, but the new proposed regulations have abandoned that format. The regulations are proposed to apply to plan years beginning on or after January 1, 2009, and may be relied on for guidance pending the issuance of final regulations.
The new Proposed Reg. §1.125-1 contains guidance on the basic framework of a cafeteria plan, including definitions, rules regarding plan requirements, rules regarding eligible participants in a cafeteria plan and qualified benefits that can be offered in a cafeteria plan.
The new proposed regulations provide that a cafeteria plan is a separate written plan that complies with the requirements of Code Sec. 125 and the regulations, that is maintained by an employer for employees and that is operated in compliance with the requirements of Code Sec. 125 and the regulations. The new proposed regulations require that the written plan:
In addition, the written cafeteria plan must indicate a plan year of twelve consecutive months. The new proposed regulations provide that a plan year is permitted to be changed only for a valid business purpose. The regulations allow a written cafeteria plan to provide for an optional grace period immediately following the end of each plan year, extending the period for incurring expenses for qualified benefits. Further, a cafeteria plan is permitted to contain a run-out period as designated by the employer. A run-out period is a period after the end of the plan year (or grace period) during which a participant can submit a claim for reimbursement for a qualified benefit incurred during the plan year (or grace period).
Unchanged from the prior proposed regulations is the requirement that all participants in a cafeteria plan be employees. The new proposed regulations provide that employees include common law employees, leased employees described in Code Sec. 414(n), and full-time life insurance salespersons. The regulations further provide that former employees (including laid-off employees and retired employees) may participate in a plan, but a plan may not be maintained predominantly for former employees.
Self-employed individuals are not treated as employees for purposes of Code Sec. 125 . Accordingly, the new proposed regulations make clear that sole proprietors, partners, and directors of corporations are not employees and may not participate in a cafeteria plan. In addition, the new proposed regulations clarify that two-percent shareholders of an S corporation are not employees for Code Sec. 125 purposes.
The new proposed regulations retain the previous examples of qualified benefits and add premiums for COBRA continuation coverage and contributions to health savings accounts (HSAs) as qualified nontaxable benefits.
The new proposed regulations continue to provide that cafeteria plans may not offer benefits that defer compensation; however, contributions to 401(k) plans through a cafeteria plan remain an exception to this prohibition. The new proposed regulations clarify the interactions between Code Sec. 125 and Code Sec. 401(k) . Contributions to a 401(k) plan expressed as a percentage of compensation are permitted. In addition, after-tax employee contributions under a qualified plan subject to Code Sec. 401(m) are permitted through a cafeteria plan.
In addition to the prior proposed list of nonqualified benefits, the new proposed regulations clarify that contributions to Archer MSAs, group-term life insurance for an employee’s spouse, child or dependent, health reimbursement arrangements (HRAs) with a carry-forward feature, and elective deferrals to 403(b) plans are also nonqualified benefits. In addition, the regulations provide that long-term care services are nonqualified benefits, but an HSA funded through a cafeteria plan may be used to pay premiums for long-term care insurance or for long-term care services.
The new Proposed Reg. §1.125-2 consolidates and clarifies the rules regarding the election of cafeteria plan benefits. These rules include the proper timing of elections, the general irrevocability of elections, the use of electronic media (rather than paper) for making the elections, the allowance of automatic elections for employees who fail to timely make elections, elections of salary reductions for HSA contributions and the proper election period for new employees.
The new proposed regulations provide that if HSA contributions are made through salary reduction under a cafeteria plan, employees may prospectively elect, revoke or change salary reduction elections for HSA contributions at any time during the plan year with respect to salary that has not become currently available at the time of the election.
A cafeteria plan is permitted to include an automatic election for new employees or current employees. A new rule also permits a cafeteria plan to provide an optional election for new employees between cash and qualified benefits. New employees avoid gross income inclusion if they make an election within 30 days after the date of hire even if benefits provided pursuant to the election relate back to the date of hire. However, salary reduction amounts used to pay for such an election must be from compensation not yet currently available on the date of the election. Also, this special election rule for new employees does not apply to any employee who terminates employment and is rehired within 30 days after terminating.
The new Proposed Reg. §1.125-5 contains the rules for the inclusion of a flexible spending arrangement (FSA) in a cafeteria plan. The regulations retain the uniform coverage and use-or-lose rules, and include the general requirements of a qualified FSA plan.
The new proposed rules also retain the forfeiture allocation rules in the 1989 proposed regulations, and clarify that the employer sponsoring the cafeteria plan may retain forfeitures, use forfeitures to defray expenses of administering the plan or allocate forfeitures among employees contributing through salary reduction on a reasonable and uniform basis.
The new proposed regulations contain rules for the proper substantiation of incurred costs that are to be reimbursed under a cafeteria plan. The regulations require that all expenses be substantiated. Therefore, substantiating only a limited number of total claims or not substantiating claims below a certain dollar amount does not satisfy the requirements in the new proposed regulations. FSAs for dependent care assistance and adoption assistance must follow the substantiation procedures applicable to health FSAs.
The new proposed regulations incorporate previously issued guidance on substantiating, paying and reimbursing expenses for Code Sec. 213(d) medical care incurred at a medical care provider when payment is made with a debit card. Among the permissible substantiation methods are copayment matches, recurring expenses, and real-time substantiation. The new proposed regulations also allow point-of-sale substantiation through matching inventory information with a list of Code Sec. 213(d) medical expenses. The employer is responsible for ensuring that the inventory information approval system complies with the new regulations and with the recordkeeping requirements in Code Sec. 6001.
Proposed Reg. §1.125-7 contains restated guidance on the application of the nondiscrimination rules with regard to key employees and highly compensated individuals. The new guidance includes definitions of key terms, guidance on the eligibility test and the contributions and benefits tests, descriptions of employees allowed to be excluded from testing and a safe harbor nondiscrimination test for premium-only-plans (POP).
Unlike the prior proposed regulations, the new proposed regulations provide an objective test to determine when the actual election of benefits is discriminatory. The regulations provide that a cafeteria plan must give each similarly situated participant a uniform opportunity to elect qualified benefits, and that highly compensated participants must not actually disproportionately elect qualified benefits.
For more information on this and related topics, consult the CCH Pension Plan Guide.
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