InsideCounsel » June 2008
Pre-Tax Facts
After decades without change, cafeteria plans experience a makeover.
“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.
While the guidelines represent more of a consolidation than a sea change, they do introduce some significant modifications to existing practices. The regulations now require the existence of a plan document and mandate specific discrimination tests to ensure that highly paid employees do not benefit disproportionately. They also institute a zero-tolerance policy that would make a plan ineligible for preferential tax treatment for any failure to comply with the regulations.
“One wrong move could subject employers and employees to significant tax liabilities,” Winzeler says.
The proposed new guidelines, issued in August 2007, have not yet been released in their final form, and at press time their precise release date was unknown.
The guidelines do provide, however, that employers who conform to the proposals will have a safe harbor even if there are changes in the final rules.
However that may be, the IRS has been firm in its commitment that the final rules will be issued in time to take effect for plan years beginning on or after Jan. 1, 2009.
“But my sense is still that clients are waiting around for the final version,” says Chris Guldberg, a partner at Baker & McKenzie.
Winzeler, who believes changes in the final version will only be technical and cosmetic, says employers shouldn’t wait around too long.
The guidance is long and complex and involves revisiting plan documents as well as the formulation and distribution of communications, forms and procedures,” she says.
Zero Tolerance
The greatest urgency arises where employers have no plan document—
a written document setting out the details of the plan.
