[Federal Register Volume 62, Number 216 (Friday, November 7, 1997)]
[Proposed Rules]
[Pages 60196-60197]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-29086]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-243025-96]
RIN 1545-AU61


Tax Treatment of Cafeteria Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Partial withdrawal of notice of proposed rulemaking, amendment 
to notice of proposed rulemaking, and notice of proposed rulemaking by 
cross reference to temporary regulations.

-----------------------------------------------------------------------

SUMMARY: This document withdraws portions of the notice of proposed 
rulemaking published in the Federal Register (54 FR 9460) on March 7, 
1989 and amends proposed regulations relating to changes in family 
status. In the Rules and Regulations section of this issue of the 
Federal Register, the IRS is issuing temporary regulations that provide 
guidance on the circumstances under which a cafeteria plan participant 
may revoke an existing election and make a new election during a period 
of coverage. The text of those temporary regulations also serves as the 
text of these proposed regulations.

DATES: Written comments and requests for a public hearing must be 
received by February 5, 1998.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-243025-96), room 
5226, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered between the 
hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-243025-96), Courier's 
Desk, Internal Revenue Service, 1111 Constitution Avenue NW, 
Washington, DC. Alternatively, taxpayers may submit comments 
electronically via the internet by selecting the ``Tax Regs'' option on 
the IRS Home Page, or by submitting comments directly to the IRS 
internet site at http://www.irs.ustreas.gov/prod/tax regs/
comments.html.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Sharon 
Cohen, (202) 622-6080; concerning submissions or to request a public 
hearing, Evangelista Lee, (202) 622-7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    Q&A-8 of Sec. 1.125-1 \1\ and Q&A-6(c) and (d) of Sec. 1.125-2 \2\ 
provide that a participant may make benefit election changes pursuant 
to changes in family status and separation from service. The temporary 
regulations set forth the standards under which a cafeteria plan can 
allow an employee to change his or her health coverage election during 
a period of coverage to conform with the special enrollment rights 
under the Health Insurance Portability and Accountability Act of 1996, 
and to change his or her health coverage or group-term life insurance 
coverage in a variety of other ``change in status'' situations. Thus, 
these proposed regulations modify Q&A-8 of Sec. 1.125-1 and Q&A-6(c) 
and (d) of Sec. 1.125-2, and clarify that the ``change in family status 
rules'' in the existing proposed regulations continue to apply to 
qualified benefits (including dependent care assistance under section 
129 and adoption assistance under section 137) other than accident or 
health coverage and group-term life insurance coverage. Election 
changes continue to be permitted where there has been a significant 
change in the health coverage of the employee or spouse attributable to 
the spouses's employment.
---------------------------------------------------------------------------

    \1\ Published as a proposed rule at 49 FR 19321 (May 7, 1984).
    \2\ Published as a proposed rule at 54 FR 9460 (March 7, 1989).
---------------------------------------------------------------------------

    In addition, the temporary regulations provide that the rules of 
section 401(k) and (m), rather than the rules in the temporary 
regulations that apply to other qualified benefits, govern election 
changes under a qualified cash or deferred arrangement (within the 
meaning of section 401(k)) or with respect to employee contributions 
under section 401(m). Therefore, the proposed regulations withdraw Q&A-
6(f) of Sec. 1.125-2.
    Temporary regulations in the Rules and Regulations section of this 
issue of the Federal Register amend the Income Tax Regulations (26 CFR 
part 1) relating to section 125. The temporary regulations contain 
rules 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.
    The text of those temporary regulations also serves as the text of 
these proposed regulations. The preamble to the temporary regulations 
explains the temporary regulations.

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) 
do not apply to these regulations, and because the regulations do 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, proposed regulations will 
be submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on their impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) that are submitted timely to the IRS. All 
comments will be available for public inspection and copying. A public 
hearing may be scheduled if requested in writing by any

[[Page 60197]]

person that timely submits written comments. If a public hearing is 
scheduled, notice of the date, time, and place for the hearing will be 
published in the Federal Register.

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.

Partial Withdrawal of Notice of Proposed Rulemaking

    Accordingly, under the authority of 26 U.S.C. 7805, Sec. 1.125-2 
Q&A-6(f) in the notice of proposed rulemaking that was published on 
March 7, 1989 (54 FR 9460) is withdrawn.

List of Subjects in 26 CFR Part 1

    Income taxes, reporting and recordkeeping requirements.

Amendments to Previously Proposed Rules

    Accordingly, the proposed rules published on May 7, 1984 (49 FR 
19321) and March 7, 1989 (54 FR 9460) are amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. In Sec. 1.125-1, as proposed May 7, 1984 (49 FR 
19321), in Q&A-8, Q-8 is republished and A-8 is amended by revising the 
last sentence to read as follows:


Sec. 1.125-1  Questions and answers relating to cafeteria plan.

* * * * *
    Q-8: What requirements apply to participants' elections under a 
cafeteria plan?
    A-8: * * * However, except for benefit elections relating to 
accident or health plans and group-term life insurance coverage, a 
cafeteria plan may permit a participant to revoke a benefit election 
after the period of coverage has commenced and to make a new election 
with respect to the remainder of the period of coverage if both the 
revocation and the new election are on account of and consistent with a 
change in family status (e.g., marriage, divorce, death of spouse or 
child, birth or adoption of child, and termination of employment of 
spouse).
* * * * *
    Par. 2. In Sec. 1.125-2, as proposed March 7, 1989 (54 FR 9460), in 
Q&A-6, Q-6 is republished and A-6 is amended by revising A-6(c) and (d) 
to read as follows:


Sec. 1.125-2  Miscellaneous cafeteria plan questions and answers.

* * * * *
    Q-6: In what circumstance may participants revoke existing 
elections and make new elections under a cafeteria plan?
    A-6: * * *
    (c) Certain Changes in Family Status. Except as otherwise provided, 
in the case of benefits other than accident or health plan coverage and 
group-term life insurance coverage, a cafeteria plan may permit a 
participant to revoke a benefit election during a period of coverage 
and to make a new election for the remaining portion of the period if 
the revocation and new election are both on account of a change in 
family status and are consistent with such change in family status. For 
purposes of this paragraph (c) of Q&A-6, examples of changes in family 
status for which a benefit election change may be permitted include the 
marriage or divorce of the employee, the death of the employee's spouse 
or a dependent, the birth or adoption of a child of the employee, the 
termination of employment (or the commencement of employment) of the 
employee's spouse, the switching from part-time to full-time employment 
status or from full-time to part-time status by the employee or the 
employee's spouse, and the taking of an unpaid leave of absence by the 
employee or the employee's spouse. Benefit election changes are 
consistent with family status changes only if the election changes are 
necessary or appropriate as a result of the family status changes. In 
the case of accident or health plans, election changes are permitted 
where there has been a significant change in the health coverage of the 
employee or spouse attributable to the spouse's employment. For 
additional rules governing cafeteria plan election changes with respect 
to accident or health plan coverage and group-term life insurance 
coverage, see Sec. 1.125-1T.
    (d) Separation from Service. Except with respect to accident or 
health plan coverage and group-term life insurance coverage, a 
cafeteria plan may permit an employee who separates from the service of 
the employer during a period of coverage to revoke existing benefit 
elections and terminate the receipt of benefits for the remaining 
portion for the coverage period. The plan must prohibit the employee, 
if the employee should return to service for the employer, from making 
new benefit elections for the remaining portion of the period of 
coverage. For rules governing cafeteria plan election changes with 
respect to accident or health plan coverage and group-term life 
insurance coverage, see Sec. 1.125-4T.
* * * * *

Proposed Amendments to the Regulations

    In addition, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAX

    Paragraph 1. The authority for part 1 continues to read in part as 
follows:

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

    Par. 2. Section 1.125-4 is added to read as follows:
    [The text of this proposed section is the same as the text of 
Sec. 1.125-4T published elsewhere in this issue of the Federal 
Register.]

Michael P. Dolan,
Acting Commissioner of Internal Revenue.
[FR Doc. 97-29086 Filed 11-6-97; 8:45 am]
BILLING CODE 4830-01-U