Federal Register / Vol. 62, No. 216 / Friday, November 7, 1997 / Rules and Regulations 60165

1The following are not qualified benefits:

products advertised, marketed, or offered as longterm care insurance; medical savings accounts

under section 106(b); qualified scholarships under

section 117; educational assistance programs under

seciton 127; and fringe benefits under section 132.

2Published as proposed rules at 49 FR 19321

(May 7, 1984) and 54 FR 9460 (March 7, 1989),

respectively.

3See section 9801(f). Similar provisions are set

forth in section 701(f) of the Employee Retirement

Income Security Act of 1974 (ERISA), and section

2701(f) of the Public Health Service Act.

Regulations under these provisions are set forth in

Treas. Reg. § 54.9801–6T; 29 C.F.R. § 2590.701–6;

and 45 C.F.R. § 146.117.

the Freedom of Information Act (5

U.S.C. 552), § 1.4 of the Treasury

Department Regulations (31 CFR 1.4),

and § 103.11(b) of the Customs

Regulations (19 CFR 103.11(b)), on

regular business days between the hours

of 9 a.m. and 4:30 p.m. at the

Regulations Branch, Office of

Regulations and Rulings, U.S. Customs

Service, Suite 3000, The Ronald Reagan

Building, 1300 Pennsylvania Avenue,

N.W., Washington, D.C.

Amendments to the Regulations

For the reasons stated above, the

effective date of final rule document FR

Doc. 97–18206, published in the

Federal Register on July 11, 1997 is

delayed until May 1, 1998.

The Regulatory Flexibility Act, and

Executive Order 12866

Because this document is not subject

to the notice and public procedure

requirements of 5 U.S.C. 553, this

document is not subject to the

provisions of the Regulatory Flexibility

Act (5 U.S.C. 601 et seq.). This

amendment does not meet the criteria

for a ‘‘significant regulatory action’’ as

specified in Executive Order 12866.

Approved: October 9, 1997.

Samuel H. Banks,

Acting Commissioner of Customs.

John P. Simpson,

Deputy Assistant Secretary of the Treasury.

[FR Doc. 97–29599 Filed 11–5–97; 2:01 pm]

BILLING CODE 4820–02–P

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8738]

RIN 1545–AV43

Tax Treatment of Cafeteria Plans

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Temporary regulations.

SUMMARY: This document contains

temporary regulations that clarify the

circumstances under which an

employer may permit a cafeteria plan

participant to revoke an existing

election and make a new election during

a period of coverage. The text of these

temporary regulations also serves as the

text of the proposed regulations set forth

in the notice of proposed rulemaking on

this subject in the proposed rules

section of this issue of the Federal

Register.

DATES: These regulations are effective

on December 31, 1998.

FOR FURTHER INFORMATION CONTACT:

Sharon Cohen, (202) 622–6080 (not a

toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments

to the Income Tax Regulations (26 CFR

part 1) under section 125. These

temporary regulations provide guidance

relating to the circumstances under

which a cafeteria plan participant may

revoke an existing election and make a

new election during a period of

coverage.

Explanation of Provisions

A ‘‘cafeteria plan’’ under section 125

allows an employee to choose between

cash and certain nontaxable benefits,

such as accident or health coverage.

Section 125 generally permits the

employee to choose the nontaxable

benefit (rather than the available cash)

without the employee having to include

the available cash in gross income. The

temporary regulations:

• Permit a cafeteria plan to allow an

employee, during a plan year, to change

his or her health coverage election to

conform with the new special

enrollment rights provided under the

Health Insurance Portability and

Accountability Act of 1996 (HIPAA),

and

• Permit a cafeteria plan to allow a

change in coverage election for a variety

of other changes in status.

These regulations are designed to

provide clear, administrable guidelines

for determining when changes can be

made in cafeteria plan elections during

a plan year.

These regulations are effective for

plan years beginning after December 31,

1998. However, taxpayers may rely on

the guidance in the temporary

regulations (or on the existing proposed

regulations) for prior periods.

Summary

Section 125 generally provides that an

employee in a cafeteria plan will not

have an amount included in gross

income solely because the employee

may choose among two or more benefits

consisting of cash and ‘‘qualified

benefits.’’ A qualified benefit generally

is any benefit that is excludable from

gross income because of an express

provision of the Code, including

coverage under an employer-provided

accident or health plan under sections

105 and 106, group-term life insurance

under section 79, elective contributions

under a qualified cash or deferred

arrangement within the meaning of

section 401(k), dependent care

assistance under section 129, and

adoption assistance under section 137.1

Under §§ 1.125–1 and 1.125–2 of the

existing proposed regulations,2 an

employee is permitted to make an

election between cash and qualified

benefits before the beginning of the

period of coverage (which generally is

the plan year of the cafeteria plan);

changes in the election during the plan

year are permitted only in limited

circumstances.

The temporary regulations clarify the

circumstances under which a cafeteria

plan may permit an employee to change

his or her cafeteria plan election with

respect to accident or health coverage or

group-term life insurance coverage

during the plan year. Proposed

regulations are also being published that

cross-reference these temporary

regulations, and that replace the change

in family status provisions in Q&A–6 of

proposed § 1.125–2 with respect to

accident or health plans and group-term

life insurance.

HIPAA Special Enrollment Rules

The temporary regulations conform

the cafeteria plan rules to the new

special enrollment rights provided

under HIPAA (which generally require

group health plans to permit individuals

to be enrolled for coverage following the

loss of other health coverage, or if a

person becomes the spouse or

dependent of an employee through

birth, marriage, adoption, or placement

for adoption).3 Under the regulations, if

an employee has a right to enroll in an

employer’s group health plan or to add

coverage for a family member under

HIPAA, the employee can make a

conforming election under the cafeteria

plan. This allows required contributions

for such health coverage to be paid on

a pre-tax basis.

Changes in Status

The temporary regulations include

rules for other events, called ‘‘changes

in status,’’ under which a cafeteria plan

may allow an employee to change his or
60166 Federal Register / Vol. 62, No. 216 / Friday, November 7, 1997 / Rules and Regulations

4See the second-to-last sentence in Q&A–6(c) of

proposed § 1.125–2.

5See § 1.125.3, published as a proposed rule at 60

FR 66229 (December 21, 1995).

6See also § 1.125–2T, published at 51 FR 4312

(January 29, 1986), which describes benefits that

may be offered under a cafeteria plan.

7See the preambles to proposed §§ 1.125–1 and

1.125–2 and Q&A–8 of proposed § 1.125–3.

her election during the plan year. The

events that constitute changes in status

under the regulations are changes in

legal marital status, number of

dependents, employment status, work

schedule, and residence or worksite,

and cases where the dependent satisfies

or ceases to satisfy the requirements for

unmarried dependents.

The regulations permit a cafeteria

plan to allow a change of election

during the plan year if a change in

status occurs that affects eligibility for

coverage and the election change

corresponds with the effect on

eligibility. For example, if under the

terms of an accident or health plan a

child of an employee loses eligibility for

coverage upon graduation from college,

the cafeteria plan may allow the

employee to cease payment for the

child’s coverage when the child

graduates and coverage ceases.

Certain of these changes in status

(marriage, birth, adoption, and

placement for adoption) overlap with

the special enrollment events under

HIPAA. The regulations include

examples that clarify the relationship

between HIPAA’s special enrollment

rights and these change in status rules.

In addition, if a change in status occurs

that entitles an employee or family

member to ‘‘COBRA’’ continuation

coverage (or coverage under a similar

State program) with respect to the

employer’s plan, the regulations permit

payments for the continuation coverage

to be made on a pre-tax basis under a

cafeteria plan.

Other Events

The regulations allow a corresponding

cafeteria plan change if a plan receives

a court order, such as a qualified

medical child support order under

section 609 of ERISA. In addition, if an

employee, spouse, or dependent

becomes entitled to Medicare or

Medicaid, a cafeteria plan can permit a

corresponding election change.

Elective Contributions Under a

Qualified Cash or Deferred Arrangement

The temporary regulations, in

provisions similar to those of the

existing proposed regulations (proposed

§ 1.125–2(f)), make clear that the rules of

section 401(k) and (m), rather than the

rules in these temporary regulations

(which apply to other qualified

benefits), govern changes in elections

under a qualified cash or deferred

arrangement (within the meaning of

section 401(k)) or with respect to

employee after-tax contributions subject

to section 401(m).

Scope of Temporary Regulations and

Reliance on Proposed Regulations

The temporary regulations do not

address certain provisions concerning

cafeteria plan election changes that are

included in the existing proposed

regulations. Guidance on these

provisions is reserved at paragraphs (f)–

(i) of the temporary regulations.

For example, future guidance under

the significant cost change provision

(reserved at paragraph (g) of the

temporary regulations), rather than the

change in status rules, would determine

whether an employee who switches

from full-time to part-time employment

and who remains eligible under the

employer’s health plan could make an

election change if the part-time

employee is required to pay

significantly higher amounts for the

coverage. The temporary regulations

also reserve guidance with respect to

provisions set forth in the existing

proposed regulations that permit an

election change in the case of a

significant change in coverage (which

includes a significant change in the

health coverage of the employee or

spouse attributable to the spouse’s

employment).4 Other matters not

addressed in the temporary regulations

include the application of the cafeteria

plan election change rules to qualified

benefits other than accident or health

coverage and group-term life insurance

coverage (for example, dependent care

assistance programs), and special rules

concerning changes in elections by

employees taking leave under the

Family and Medical Leave Act of 1993

(Pub. L. 103–3).5 Pending further

guidance, taxpayers can continue to rely

on the existing proposed regulations 6

concerning these and other matters not

addressed in the temporary regulations.7

The temporary regulations are

effective for plan years beginning after

December 31, 1998. Prior to that date,

however, taxpayers can rely on the

guidance provided in the temporary

regulations (as well as on the guidance

provided in the existing proposed

regulations that relates to matters

addressed in the temporary regulations)

in order to comply with the provisions

of section 125.

Special Analyses

It has been determined that this

Treasury Decision is not a significant

regulatory action as defined in EO

12866. Therefore, a regulatory

assessment is not required. It also has

been determined that section 553(b) of

the Administrative Procedure Act (5

U.S.C. chapter 5) does not apply to these

regulations, and because the regulation

does not impose a collection of

information on small entities, the

Regulatory Flexibility Act (5 U.S.C.

chapter 6) does not apply. Pursuant to

section 7805(f) of the Internal Revenue

Code, these temporary regulations will

be submitted to the Chief Counsel for

Advocacy of the Small Business

Administration for comment on its

impact on small business.

Drafting Information

The principal authors of these

regulations are Catherine Fuller and

Sharon Cohen, Office of the Associate

Chief Counsel (Employee Benefits and

Exempt Organizations). However, other

personnel from the IRS and Treasury

Department participated in their

development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and

recordkeeping requirements.

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR part 1 is

amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority for part 1

continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. § 1.125–4T is added to read as

follows:

§ 1.125–4T Permitted election changes

(temporary).

(a) Election changes. A cafeteria plan

may permit an employee to revoke an

election during a period of coverage and

to make a new election only as provided

in paragraphs (b) through (i) of this

section. See paragraph (j) of this section

for special provisions relating to

qualified cash or deferred arrangements.

(b) Special enrollment rights. A

cafeteria plan may permit an employee

to revoke an election for accident or

health coverage during a period of

coverage and make a new election that

corresponds with the special enrollment

rights provided in section 9801(f),

whether or not the change in election is

permitted under paragraph (c) of this

section.
Federal Register / Vol. 62, No. 216 / Friday, November 7, 1997 / Rules and Regulations 60167

(c) Changes in status for accident or

health coverage and group-term life. (1)

In general. A cafeteria plan may permit

an employee to revoke an election for

accident or health coverage or groupterm life insurance coverage during a

period of coverage and make a new

election for the remaining portion of the

period if, under the facts and

circumstances —

(i) A change in status occurs; and

(ii) The election change satisfies the

consistency requirement in paragraph

(c)(3) of this section (consistency rule

for accident or health coverage) or (c)(4)

of this section (consistency rule for

group-term life insurance coverage).

(2) Change in status events. The

following events are changes in status

for purposes of this paragraph (c):

(i) Legal marital status. Events that

change an employee’s legal marital

status, including marriage, death of

spouse, divorce, legal separation, or

annulment;

(ii) Number of dependents. Events

that change an employee’s number of

dependents (as defined in section 152),

including birth, adoption, placement for

adoption (as defined in regulations

under section 9801), or death of a

dependent;

(iii) Employment status. A

termination or commencement of

employment by the employee, spouse,

or dependent;

(iv) Work schedule. A reduction or

increase in hours of employment by the

employee, spouse, or dependent,

including a switch between part-time

and full-time, a strike or lockout, or

commencement or return from an

unpaid leave of absence;

(v) Dependent satisfies or ceases to

satisfy the requirements for unmarried

dependents. An event that causes an

employee’s dependent to satisfy or cease

to satisfy the requirements for coverage

due to attainment of age, student status,

or any similar circumstance as provided

in the accident or health plan under

which the employee receives coverage;

and

(vi) Residence or Worksite. A change

in the place of residence or work of the

employee, spouse, or dependent.

(3) Consistency rule for accident or

health coverage. (i) General rule. (A) An

employee’s revocation of a cafeteria

plan election during a period of

coverage and new election for the

remaining portion of the period

(referred to below as an ‘‘election

change’’) is consistent with a change in

status if, and only if—

(1) The change in status results in the

employee, spouse, or dependent gaining

or losing eligibility for accident or

health coverage under either the

cafeteria plan or an accident or health

plan of the spouse’s or dependent’s

employer; and

(2) The election change corresponds

with that gain or loss of coverage.

(B) A change in status results in an

employee, spouse, or dependent gaining

(or losing) eligibility for coverage under

a plan only if the individual becomes

eligible (or ineligible) to participate in

the plan. A cafeteria plan may treat an

individual as gaining (or losing)

eligibility for coverage if the individual

becomes eligible (or ineligible) for a

particular benefit package option under

a plan (e.g., a change in status results in

an individual becoming eligible for a

managed care option or an indemnity

option). If, as a result of a change in

status, the individual gains eligibility

for elective coverage under a plan of the

spouse’s or dependent’s employer, the

consistency rule of this paragraph

(c)(3)(i) is satisfied only if the individual

elects the coverage under the spouse’s

or dependent’s employer. See the

Examples in paragraph (k) of this

section for illustrations of the

consistency rule.

(ii) Exception for COBRA.

Notwithstanding paragraph (c)(3)(i) of

this section, if the employee, spouse, or

dependent becomes eligible for

continuation coverage under the

employer’s group health plan as

provided in section 4980B or any

similar State law, the employee may

elect to increase payments under the

employer’s cafeteria plan in order to pay

for the continuation coverage.

(4) Consistency rule for group-term

life insurance coverage. Except as

provided in this paragraph (c)(4), the

provisions of paragraph (c)(3)(i) of this

section apply to group-term life

insurance coverage. In the case of

marriage, birth, adoption, or placement

for adoption, a cafeteria plan can allow

an election change to increase (but not

to reduce) the amount of the employee’s

life insurance coverage. In the case of

divorce, legal separation, annulment, or

death of a spouse or dependent, a

cafeteria plan may allow an election

change to reduce (but not to increase)

the amount of the employee’s life

insurance coverage.

(d) Judgment, decree, or order. This

paragraph (d) applies to a judgment,

decree, or order (‘‘order’’) resulting from

a divorce, legal separation, annulment,

or change in legal custody (including a

qualified medical child support order

defined in section 609 of the Employee

Retirement Income Security Act of

1974) that requires accident or health

coverage for an employee’s child.

Notwithstanding the provisions of

paragraph (c) of this section, a cafeteria

plan may—

(1) Change the employee’s election to

provide coverage for the child if the

order requires coverage under the

employee’s plan; or

(2) Permit the employee to make an

election change to cancel coverage for

the child if the order requires the former

spouse to provide coverage.

(e) Entitlement to Medicare or

Medicaid. If an employee, spouse, or

dependent who is enrolled in an

accident or health plan of the employer

becomes entitled to coverage (i.e.,

enrolled) under Part A or Part B of Title

XVIII of the Social Security Act

(Medicare) or Title XIX of the Social

Security Act (Medicaid), other than

coverage consisting solely of benefits

under section 1928 of the Social

Security Act (the program for

distribution of pediatric vaccines), a

cafeteria plan may permit the employee

to make an election change to cancel

coverage of that employee, spouse or

dependent under the accident or health

plan.

(f) Changes in status for other

qualified benefits. [Reserved].

(g) Significant coverage or cost

changes. [Reserved].

(1) Employer’s plan. [Reserved].

(2) Plan of spouse’s or dependent’s

employer. [Reserved].

(h) Cessation of required

contributions. [Reserved].

(i) Special requirements concerning

the Family and Medical Leave Act.

[Reserved].

(j) Elective contributions under a

qualified cash or deferred arrangement.

The provisions of this section do not

apply with respect to elective

contributions under a qualified cash or

deferred arrangement (within the

meaning of section 401(k)) or employee

contributions subject to section 401(m).

Thus, a cafeteria plan may permit an

employee to modify or revoke elections

in accordance with sections 401(k) and

401(m) and the regulations thereunder.

(k) Examples. The following examples

illustrate the rules of this section. In

each case involving an accident or

health plan, assume that the plan is

subject to section 9801(f) (providing for

special enrollment rights under certain

group health plans).

Example 1. (i) Employer M provides health

coverage for its employees under which

employees may elect either employee-only

coverage or family coverage. M also

maintains a calendar year cafeteria plan

under which qualified benefits, including

health coverage, are funded through salary

reduction. M’s employee, A, elects employeeonly health coverage before the beginning of

the calendar year. During the year, A adopts
60168 Federal Register / Vol. 62, No. 216 / Friday, November 7, 1997 / Rules and Regulations

a child, C. Within 30 days thereafter, A wants

to revoke A’s election for employee-only

health coverage and obtain family health

coverage, as of the date of C’s adoption. A

satisfies the conditions for special enrollment

of an employee with a new dependent under

section 9801(f)(2), so that A may enroll in

family coverage under M’s accident or health

plan in order to provide coverage for C,

effective as of the date of C’s adoption.

(ii) In this Example 1, M’s cafeteria plan

may permit A to change the employee’s

salary reduction election to family coverage

for salary not yet currently available. The

increased salary reduction could reflect the

cost of family coverage from the date of

adoption. (The adoption of C is also a change

in status, and the election of family coverage

is consistent with that change in status. Thus,

under the change in status provisions of

paragraph (c) of this section, M’s cafeteria

plan could permit A to elect family coverage

prospectively in order to cover C for the

remaining portion of the coverage period.)

Example 2. (i) The employer plans and

permissible coverage are the same as in

Example 1. Before the beginning of the

calendar year, Employee A elects employeeonly health coverage under M’s cafeteria

plan. A marries B during the plan year. B’s

employer, N, offers health coverage to N’s

employees, and, prior to the marriage, B had

elected employee-only coverage. A wants to

revoke the election for employee-only

coverage, and is considering electing family

health coverage under M’s plan or obtaining

family health coverage under N’s plan.

(ii) In this Example 2, A’s marriage to B is

a change in status. Two possible election

changes by A would be consistent with the

change in status: to cover A and B by electing

family health coverage under M’s plan, or to

cancel coverage under M’s plan (with B

electing family health coverage under N’s

plan in order to cover A and B). Thus, M’s

cafeteria plan may permit A to make either

change in election. (M’s cafeteria plan could

also permit A to change A’s salary reduction

election to reflect the change to family

coverage under M’s group health plan in

accordance with paragraph (b) of this section

because the marriage would also create

special enrollment rights under section

9801(f), pursuant to which an election of

family coverage under M’s plan would be

required to be effective no later than the first

day of the first calendar month beginning

after the completed request for enrollment is

received by the plan.)

Example 3. (i) Employee G, a single parent,

elects family health coverage under a

calendar year cafeteria plan maintained by

Employer O. G and G’s 21-year old child, H,

are covered under O’s health plan. During the

year, H graduates from college. Under the

terms of the health plan, dependents over the

age of 19 must be full-time students to

receive coverage. G wants to revoke G’s

election for family health coverage and

obtain employee-only coverage under O’s

cafeteria plan.

(ii) In this Example 3, H’s loss of eligibility

for coverage under the terms of the health

plan is a change in status. A revocation of G’s

election for family coverage and new election

of employee-only coverage is consistent with

the change in status. Thus, O’s cafeteria plan

may permit G to elect employee-only

coverage.

Example 4. (i) Employee J is married to K

and they have one child, S. A calendar year

cafeteria plan maintained by Employer P

allows employees to elect no health coverage,

employee-only coverage, employee-plus-onedependent coverage, or family coverage.

Under the plan, before the beginning of the

calendar year, J elects family health coverage

for J, K, and S. J and K divorce during the

year and, under the terms of P’s accident or

health plan, K loses eligibility for P’s health

coverage. S does not lose eligibility for health

coverage under P’s plan upon the divorce. J

now wants to revoke J’s election under the

cafeteria plan and elect no coverage.

(ii) In this Example 4, the divorce is a

change in status. A change in the cafeteria

plan election to cancel health coverage for K

is consistent with that change in status.

However, the divorce does not affect J’s or S’s

eligibility for health coverage. Therefore, an

election change to cancel J’s or S’s health

coverage is not consistent with the change in

status. The cafeteria plan, however, may

permit J to elect employee-plus-onedependent health coverage.

Example 5. (i) The facts are the same as

Example 4, except that, before the beginning

of the year, Employee J elected employeeonly health coverage (rather than family

coverage). Pursuant to J s divorce agreement

with K, P s health plan receives a qualified

medical child support order (as defined in

section 609 of the Employee Retirement

Income Security Act) during the plan year.

The order requires P s health plan to cover

S.

(ii) In this Example 5, P’s cafeteria plan

may change J’s election from employee-only

health coverage to employee-plus-onedependent coverage in order to cover S.

Example 6. (i) Before the beginning of the

coverage period, Employee L elects to

participate in a cafeteria plan maintained by

L’s Employer, Q. However, in order to change

the election during the coverage period so as

to cancel coverage, and by prior

understanding with Q, L terminates

employment and resumes employment one

week later.

(ii) In this Example 6, under the facts and

circumstances, in which a principal purpose

of the termination of employment was to

alter the election and reinstatement of

employment was understood at the time of

termination, L does not have a change in

status. However, L’s termination of

employment would constitute a change in

status, permitting a cancellation of coverage

during the period of unemployment, if L s

original cafeteria plan election was reinstated

upon resumption of employment (for

example, because of a cafeteria plan

provision requiring an employee who

resumes employment within 30 days,

without any other intervening event that

would permit a change in election, to return

to the election in effect prior to termination

of employment).

Example 7. (i) Employer R maintains a

calendar year cafeteria plan under which

full-time employees may elect coverage

under one of three benefit package options

provided under an accident or health plan:

an indemnity option or either of two HMO

options for employees that work in the

respective service areas of the two HMOs.

Employee T, who works in the service area

of HMO #1, elects the HMO #1 option. During

the year, T is transferred to another work

location which is outside the HMO #1 service

area and inside the HMO #2 service area.

(ii) In this Example 7, the transfer is a

change in status and, under the consistency

rule, the cafeteria plan may permit T to make

an election change to either the indemnity

option or HMO #2, or to cancel accident or

health coverage.

Example 8. (i) A calendar year cafeteria

plan maintained by Employer S allows

employees to elect coverage under an

accident or health plan providing indemnity

coverage and under a flexible spending

arrangement (FSA). Prior to the beginning of

the calendar year, Employee U elects

employee-only indemnity coverage, and

coverage under the FSA for up to $600 of

reimbursements for the year to be funded by

salary reduction contributions of $600 during

the year. U’s spouse, V, has employee-only

coverage under an accident or health plan

maintained by V’s employer. During the year,

V terminates employment and loses coverage

under that plan. U now wants to elect family

coverage under S’s accident or health plan

and increase U’s FSA election.

(ii) In this Example 8, V’s termination of

employment is a change in status. The

cafeteria plan may permit U to elect family

coverage under S’s accident or health plan,

and to increase U’s FSA coverage.

Example 9. (i) Employer T provides groupterm life insurance coverage as described

under section 79. Under T’s plan, an

employee may elect life insurance coverage

in an amount up to the lesser of his or her

salary or $50,000. T also maintains a calendar

year cafeteria plan under which qualified

benefits, including the group-term life

insurance coverage, are funded through

salary reduction. Before the beginning of the

calendar year, Employee W elects $10,000 of

life insurance coverage, with W s spouse, X,

as the beneficiary. During the year, a child is

placed for adoption with W and X. W wants

to increase W’s election for life insurance

coverage to $50,000 (without changing the

designation of X as the beneficiary).

(ii) In this Example 9, the placement of a

child for adoption with W is a change in

status. The increase in coverage is consistent

with the change in status. Thus, W’s cafeteria

plan may permit W to increase W’s life

insurance coverage.

(1) Effective Date. This section is

effective for plan years beginning after

December 31, 1998.

Michael P. Dolan,

Acting Commissioner of Internal Revenue.

Dated: October 10, 1997.

Donald C. Lubick,

Acting Assistant Secretary of the Treasury.

[FR Doc. 97–29087 Filed 11–6–97; 8:45 am]

BILLING CODE 4830–01–U