Flexible Benefits Newsletter - May, 2000

IRS STANCE REGARDING CODE SECTION 125 ADVANCE ELECTIONS

Cafeteria Benefit Plans are allowed under Section 125 of the IRC. The regulations supporting this Code Section govern what may or may not be construed as non-taxable or qualified benefits.

The Code Section requires that an election for a qualified benefit (i.e. the decision to accept a qualified benefit in lieu of a "cash" or non-qualified benefit) be "in advance" of the actual receipt of the benefit. Furthermore, the Code goes on to explain that a benefit election is "irrevocable" unless a qualifying event has occurred.

At the Employer's Council on Flexible Compensation (ECFC) Annual Symposium March 30 - April 1, Mr. Harry Beker and other staff from the IRS discussed the newly approved (March 23, 2000) "change in status" regulations. Several questions arose regarding the time period governing a valid "status change." While he refused to designate an exact definition of "timely" Mr. Beker used the 30 day window as a valid assumption. He was further questioned on the timeliness of an initial election for employers who offer immediate participation in a flexible benefits plan, to their new hires. While conceding that the "30 day window" may be extended to initial enrollment, he was quick to add that benefits could not be placed in effect until AFTER the election was made. Anything else would be considered in direct violation of the statute. He reminded us that this should not be construed as a NEW interpretation and this practice should be in current use. I will tell you that a number of attendees groaned loudly!

This interpretation was further explored by Mark Wincek, Esq., CFCI of the Washington law firm of Kilpatrick and Stockton, LLP. Mr Wincek is a frequent contributor to ECFC publications and the Employee Benefits Institute of America LLC Cafeteria Plans newsletter. Mark indicated that the IRS has issued guidelines on audit practices. He feels that cafeteria plans have become a valid target for audit and employers should take an aggressive stance on correcting their plans and practices, at this point.

He went so far as to indicate that inconsistent payroll and administrator records of pre-tax benefits elections would be questioned unless documentation of "mistakes" and "timely corrections" was not maintained.

In keeping with these clarifications, we are concerned that all of our employers have written procedures and policies for handling the requirement of an "advance election" of cafeteria plan benefits.

We remind all employers that you remain the legal administrator of your Plan. We function as a record keeper and compliance supervisor. While responsible for our own errors and omissions, we cannot be responsible for willful non-compliance once notified of the problem.

We remind you that many insurance carriers, mindful of the Cafeteria Plan requirements and audit potential have required that insurance applications be dated prior to the Plan entry date. They have a further concern, as well. These carriers realize that an employee may choose not to enroll in a life or disability plan and then have a sudden change in health and retroactively attempt to enroll. This has negative consequences on the group experience and can cause a litigious situation brought on by an employee who later determines that he/she, also would like to retroactively enroll in coverage. The cases have occurred and the carriers are wary.

Please contact us a if we can work with you to establish corrections to your practice.