Changes to cafeteria plan revocations and elections necessitate plan qualification review.

• Author: Cavanaugh, Maureen

On Nov. 7, 1997, the IRS issued Temp. Regs. Sec. 1.125-4T, effective on Dec. 31, 1998, and new Prop. Regs. Secs. 1.125-1, Q&A-8 and 1.125-2, Q&A-6, replacing guidance issued originally in 1984 and 1989, respectively, on revocations and elections made to cafeteria plans. These regulations are effective for plan years beginning after 1998. During the interim, the taxpayer may rely either on the new temporary and proposed regulations or on the earlier proposed regulations. Plan documents, administrative procedures and employee communications should be reviewed and changed as needed, no later than Dec. 31, 1998, to ensure that cafeteria plan revocation and election procedures fully comply with the new regulations and thus ensure continued qualification as cafeteria plans under Sec. 125.

Cafeteria plans that satisfy Sec. 125 and the regulations allow employees to elect to forgo cash in lieu of receiving certain statutorily excludible benefits (such as medical, disability, accident or health, and group life). In short, such plans allow employees to convert what would otherwise be taxable compensation into excludable benefits suiting their particular needs.

Both the new temporary and proposed regulations and the old proposed regulations provide for revocation and election of cafeteria plan benefits on a change in the employee's or a dependent's status if the change is consistent with that status. The temporary regulations, however, expressly state that the enumerated change-in-status conditions are the exclusive provisions for all elections and revocations. (The original proposed regulations contained no such suggestion of exclusivity.) While providing clear and administratively simple guidelines, the limited circumstances under which the temporary regulations provide for revocations and elections do not necessarily encompass the reality of employment situations; moreover, offering revocation or election possibilities beyond those expressly sanctioned endangers the qualification of those cafeteria plans.

While motivated by the need to allow revocations and elections consistent with the provisions of the Health Insurance Portability and Accountability Act of 1996 (HIPAA), the provisions of more universal concern are those defining which status changes may permit revocations and elections in accident, health and group-term life. Changes in Medicare or Medicaid status or a judgment, order or decree relating to marital or custody matters will also...