IRS Revives Long-Dormant Cafeteria Plan Rules With New Proposed Regulations

The Internal Revenue Service (IRS) recently withdrew numerous old proposed cafeteria plan regulations and guidance, some of which dated all the way back to 1984, and issued five new proposed regulations that update and expand the rules that govern the design, operation, and nondiscrimination rules applicable to cafeteria plans under Internal Revenue Code section 125. The reproposed regulations are expected to apply to plan years beginning on or after January 1, 2009 but can be relied on in the interim.

The new proposed regulations establish the critical tax framework that allows employees to choose between taxable and nontaxable benefits without triggering taxable income. The regulations emphasize that the cafeteria plan rules are the exclusive means by which employees can make that choice and that the mere opportunity to make such a choice will result in undesirable taxation unless a cafeteria plan satisfies all of the requirements of section 125 and the proposed regulations.

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