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Pre-Tax Facts

"Stony silence" is probably the best way to describe the corporate community's initial response to the Internal Revenue Service's (IRS) first comprehensive new guidance on "cafeteria plans" since 1984. Cafeteria plans allow employees to pay into certain employee benefits with pre-tax payroll deductions.

"We're not seeing employers taking action," says Heidi Winzeler, counsel at Osler Hoskin & Harcourt.

They will need to ensure that these benefits are removed from the menu available to participants under the cafeteria plan and decide whether to offer these benefits under a separate benefits plan that offers no tax advantages or remove them entirely.

Here, zero tolerance looms again in the sense that a cafeteria plan that offers any of the "prohibited benefits" will be ineligible for preferential treatment in its entirety.

What's clear, then, is that many cafeteria plans are due--and perhaps overdue-- for a checkup.


Julius Melnitzer

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