Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Proposed Rules 66229

any other provision of federal law,

including provisions of the Employee

Retirement Income Security Act of 1974

(ERISA) administered by the Secretary

of Labor.

Explanation of Provisions

The proposed regulations add a new

paragraph to § 1.501(c)(5)–1 providing

that an organization is not an

organization within the meaning of

section 501(c)(5) if the organization’s

principal activity is to manage savings

or investment plans or programs,

including retirement savings plans.

Proposed Effective Date

These regulations are proposed to be

effective December 21, 1995.

Special Analyses

It has been determined that this notice

of proposed rulemaking 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) and the Regulatory

Flexibility Act (5 U.S.C. chapter 6) do

not apply to these regulations, and,

therefore, a Regulatory Flexibility

Analysis is not required. Pursuant to

section 7805(f) of the Internal Revenue

Code, this notice of proposed

rulemaking will be submitted to the

Chief Counsel for Advocacy of the Small

Business Administration for comment

on its 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 a

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 author of these

regulations is Robin Ehrenberg, Office of

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.

Proposed Amendments to the

Regulations

Accordingly, 26 CFR part 1 is

proposed to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation

for part 1 continues to read in part as

follows:

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

Par. 2. Section 1.501(c)(5)–1 is

amended by:

1. Redesignating paragraph (b) as

paragraph (c).

2. Adding a new paragraph (b) to read

as follows:

§ 1.501(c)(5)-1 Labor, agricultural, and

horticultural organizations.

* * * * *

(b)(1) An organization is not an

organization described in section

501(c)(5) if the principal activity of the

organization is to receive, hold, invest,

disburse, or otherwise manage funds

associated with savings or investment

plans or programs, including pension or

other retirement savings plans or

programs.

(2) Example. Trust A is organized in

accordance with a collective bargaining

agreement between a labor union and

multiple employers. Representatives of both

the employers and the union serve as

trustees. Trust A receives funds from the

employers who are subject to the agreement,

invests the funds and uses the funds and

accumulated earnings to pay pension benefits

to union members as specified in the

agreement. It also provides information to

union members about their retirement

benefits and assists them with administrative

tasks associated with the benefits. Most of

Trust A’s activities are devoted to these

functions. From time to time, Trust A also

participates in the renegotiation of the

collective bargaining agreement. Because

Trust A’s principal activity is to manage

funds associated with a pension plan, it is

not an organization described in section

501(c)(5).

* * * * *

Margaret Milner Richardson,

Commissioner of Internal Revenue.

[FR Doc. 95–30830 Filed 12–20–95; 8:45 am]

BILLING CODE 4830–01–U

26 CFR Part 1

[EE–20–95]

RIN 1545–AT47

Effect of the Family and Medical Leave

Act on the Operation of Cafeteria Plans

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains

proposed regulations relating to

cafeteria plans that reflect changes made

by the Family and Medical Leave Act of

1993. The proposed regulations provide

the public with guidance needed to

comply with the Act and affect

employees who participate in cafeteria

plans.

DATES: Written comments and requests

for a public hearing must be received by

March 20, 1996.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (EE–20–95), room

5228, Internal Revenue Service, POB

7604, Ben Franklin Station, Washington,

DC 20044. In the alternative,

submissions may be hand delivered

between the hours of 8 a.m. and 5 p.m.

to: CC:DOM:CORP:R (EE–20–95),

Courier’s Desk, Internal Revenue

Service, 1111 Constitution Avenue NW.,

Washington, DC.

FOR FURTHER INFORMATION CONTACT:

Concerning the regulations, Catherine

Fuller, (202) 622–6080; concerning

submissions and the hearing, Mike

Slaughter, (202) 622–8452 (not toll-free

numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed

additions to the Income Tax Regulations

(26 CFR Part 1) under section 125 of the

Internal Revenue Code of 1986 (Code).

These additions are proposed to

conform the regulations to the Family

and Medical Leave Act of 1993 (FMLA),

Public Law 103–3. FMLA imposes

certain requirements on employers

regarding coverage, including family

coverage, under group health plans for

employees taking FMLA leave, and

regarding the restoration of benefits to

employees who return from FMLA

leave. This notice of proposed

rulemaking addresses a number of the

principle questions that have been

raised about how these FMLA

requirements affect the operation of

cafeteria plans (including flexible

spending arrangements) maintained

under section 125 of the Code. The rules

in this notice of proposed rulemaking

supplement the proposed Income Tax

Regulations under section 125 of the

Code. Except as otherwise provided in

this notice of proposed rulemaking, all

of the existing rules governing cafeteria

plans, including the nondiscrimination

rules, continue to apply.

The requirements pertaining to FMLA

leave, including the employer’s

obligation to maintain coverage under a

group health plan during FMLA leave

and to restore benefits upon return from

FMLA leave, are established by FMLA,
66230 Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Proposed Rules

1Published as a proposed rule at 49 FR 19321

(May 7, 1984).

not the Code. The U.S. Department of

Labor, in 29 CFR part 825, has

published rules interpreting the

requirements of FMLA, and the

Department of Labor has jurisdiction

relating to those rights or obligations.

This notice of proposed rulemaking

does not interpret FMLA; it provides

guidance on the cafeteria plan rules that

apply to an employee in circumstances

to which FMLA and the Labor

Regulations thereunder also apply. The

Department of Labor has advised the

Department of the Treasury, including

the Internal Revenue Service (IRS), that

the provisions of this notice of proposed

rulemaking do not conflict with, and are

not inconsistent with, the provisions of

FMLA or the Labor Regulations

thereunder.

Special Analyses

It has been determined that this notice

of proposed rulemaking 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) and the Regulatory

Flexibility Act (5 U.S.C. chapter 6) do

not apply to these regulations, and,

therefore, a Regulatory Flexibility

Analysis is not required. Pursuant to

section 7805(f) of the Code, this notice

of proposed rulemaking will be

submitted to the Chief Counsel for

Advocacy of the Small Business

Administration for comment on its

impact on small business.

Comments and Requests for a 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 a

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 author of these

regulations is Catherine Fuller, Office of

Associate Chief Counsel (Employee

Benefits and Exempt Organizations).

However, other personnel from the IRS

and Department of the Treasury

participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and

recordkeeping requirements.

Proposed Amendments to the

Regulations

Accordingly, 26 CFR part 1 is

proposed to be 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.Section 1.125–3 is added to read

as follows:

§ 1.125–3 Effect of the Family and Medical

Leave Act (FMLA) on the operation of

cafeteria plans.

Q–1: May an employee taking FMLA

leave revoke an existing election of

group health plan coverage under a

cafeteria plan?

A–1: Yes. An employee taking FMLA

leave may revoke an existing election of

group health plan coverage (including a

health flexible spending arrangement

(FSA)) under a cafeteria plan for the

remaining portion of the coverage

period. See 29 CFR 825.209(e). FMLA

also requires that an employee be

permitted to choose to be reinstated in

the group health plan coverage

(including a health FSA) provided

under a cafeteria plan upon returning

from FMLA leave if the employee’s

group health plan coverage terminated

while on FMLA leave (either by

revocation or nonpayment of

premiums). Such an employee is

entitled, under FMLA, to be reinstated

on the same terms as prior to taking

FMLA leave (including family or

dependent coverage). See 29 CFR

825.209(e) and 825.215(d). However, the

employee has no greater right to benefits

for the remainder of the plan year than

an employee who has been

continuously working during the plan

year. In addition to the rights granted

under FMLA, such an employee has the

right to revoke or change elections (e.g.,

because of changes in family status or

significant cost or coverage changes

imposed by a third-party provider)

under the same terms and conditions as

are available to employees participating

in the cafeteria plan who are not on

FMLA leave.

Q–2: Who is responsible for making

premium payments under a cafeteria

plan when an employee on FMLA leave

continues group health plan coverage?

A–2: An employee is entitled to

continue group health plan coverage

(including a health FSA) during FMLA

leave whether or not provided under a

health FSA or other component of a

cafeteria plan. See 29 CFR 825.209(b).

An employee making premium

payments under a cafeteria plan who

chooses to continue group health plan

coverage (including a health FSA) while

on FMLA leave is responsible for the

share of group health premiums that the

employee was paying while working,

such as amounts paid pursuant to a

salary reduction agreement. The

employer must continue to contribute

the share of the cost of the employee’s

coverage that the employer was paying

before the employee commenced FMLA

leave. See 29 CFR 825.100(b) and

825.210(a).

Q–3: What payment options are

required or permitted to be offered

under a cafeteria plan to an employee

who continues group health plan

coverage (including a health FSA) while

on unpaid FMLA leave, and what is the

tax treatment of these payments?

A–3: (a) In general A cafeteria plan

may, on a nondiscriminatory basis, offer

one or more of the following payment

options (subject to the limitations

described in paragraph (b) of this Q&A–

3) to an employee who continues group

health plan coverage (including a health

FSA) while on unpaid FMLA leave.

These options are referred to in this

section as pre-pay, pay-as-you-go and

catch-up.

(1) Pre-pay. (i) Under the pre-pay

option, a cafeteria plan may permit an

employee to pay, prior to

commencement of the FMLA leave

period, the amounts due for the FMLA

leave period. However, the Labor

Regulations under FMLA provide that

under no circumstances may the

employer mandate that an employee

pre-pay the amounts due for the leave

period. See 29 CFR 825.210(c)(3) and

(4).

(ii) Contributions under the pre-pay

option may be made on a pre-tax salary

reduction basis from any taxable

compensation (including the cashing

out of unused sick days or vacation

days). These contributions will not be

included in the employee’s gross

income, provided that all cafeteria plan

requirements are satisfied. For example,

see Q&A–5 of this section regarding

restrictions on pre-tax salary reduction

contributions when an employee’s

FMLA leave spans two cafeteria plan

years.

(iii) Contributions under the pre-pay

option may also be made on an after-tax

basis. See Prop. Treas. Reg. § 1.125–1,

Q&A–5.1
Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Proposed Rules 66231

2Published as a proposed rule at 49 FR 19321

(May 7, 1984).

3Published as a proposed rule at 54 FR 9460

(March 7, 1989).

(2) Pay-as-you-go. (i) Under the payas-you-go option, employees may pay

their share of the premium payments on

the same schedule as payments would

be made if the employee were not on

leave or under any other payment

schedule permitted by the Labor

Regulations at 29 CFR 825.210(c) (i.e.,

on the same schedule as payments are

made under the Consolidated Omnibus

Reconciliation Act of 1985, Public Law

99–272; under the employer’s existing

rules for payment by employees on

leave without pay; or under any other

system voluntarily agreed to between

the employer and the employee that is

not inconsistent with this section or

with 29 CFR 825.210(c)).

(ii) Contributions under the pay-asyou-go option are generally made by the

employee on an after-tax basis.

However, contributions may be made on

a pre-tax basis to the extent that the

contributions are made from taxable

compensation (e.g., cashing out unused

sick or vacation days) that is due the

employee during the leave period, and

provided that all cafeteria plan

requirements are satisfied.

(iii) An employer is not required to

continue the health coverage of an

employee who fails to make required

premium payments while on FMLA

leave. See 29 CFR 825.212. However, if

the employer chooses to continue the

health coverage of an employee who

fails to make required premium

payments while on FMLA leave, the

employer is entitled to recoup those

payments as set forth in paragraph

(a)(3)(i) of this Q&A–3. See also Q&A–

6 of this section regarding coverage

under a health FSA when an employee

fails to make the required premium

payments while on FMLA leave.

(3) Catch-up. (i) An employer that

continues providing group health

coverage to an employee who does not

pay premiums on FMLA leave is, to the

extent provided under the Labor

Regulations, permitted to utilize the

catch-up option to recoup the

employee’s share of premium payments.

See, e.g., 29 CFR 825.212(b).

(ii) Where an employee is electing to

use the catch-up option, the employer

and the employee must agree in advance

of the coverage period that: the

employee elects to continue health

coverage while on unpaid FMLA leave;

the employer will assume responsibility

for advancing payment of the premiums

on the employee’s behalf during the

FMLA leave; and these advance

amounts must be paid by the employee

when the employee returns from FMLA

leave.

(iii) Contributions under the catch-up

option may be made on a pre-tax salary

reduction basis when the employee

returns from FMLA leave from any

available taxable compensation

(including the cashing out of unused

sick days and vacation days). These

contributions will not be included in

the employee’s gross income, provided

that all cafeteria plan requirements are

satisfied.

(iv) Contributions under the catch-up

option may also be made on an after-tax

basis. See Prop. Treas. Reg. § 1.125–1,

Q&A–5.2

(b) Exceptions. Cafeteria plans may

offer (pursuant to 29 CFR 825.210(c))

one or more of the payment options

described in paragraph (a) of this Q&A–

3, with the following exceptions:

(1) The pre-pay option cannot be the

sole option offered to employees on

FMLA leave. However, the cafeteria

plan may include pre-payment as an

option for employees on FMLA leave,

even if such option is not offered to

employees on non-FMLA leavewithout-pay.

(2) The catch-up option can be the

sole option offered to employees on

FMLA leave if and only if the catch-up

option is the sole option offered to

employees on non-FMLA leave-withoutpay.

(3) A cafeteria plan cannot offer

employees on FMLA leave a choice of

either the pre-pay option or the catchup option without also offering the payas-you-go option, if the pay-as-you- go

option is offered to employees on nonFMLA leave-without-pay.

(c) Voluntary waiver of employee

payments. In addition to the foregoing

payment options, an employer may

voluntarily waive, on a

nondiscriminatory basis, the

requirement that employees who elect

to continue health coverage while on

FMLA leave pay the amounts the

employees would otherwise be required

to pay for the leave period.

Q–4: Do the special FMLA

requirements concerning an employee

who continues group health plan

coverage under a cafeteria plan apply if

the employee is on paid FMLA leave?

A–4: No. The Labor Regulations

provide that, if an employee’s FMLA

leave is substituted paid leave as

described at 29 CFR 825.207 and the

employee continues group health plan

coverage while on FMLA leave, the

employee’s share of the premiums must

be paid by the method normally used

during any paid leave (i.e., salary

reduction). See 29 CFR 825.210(b).

Q–5: What restrictions apply to

contributions when an employee’s

FMLA leave spans two cafeteria plan

years?

A–5: (a) Contributions to a cafeteria

plan during FMLA leave will not be

included in an employee’s gross

income, provided that the plan complies

with all cafeteria plan requirements.

Among other requirements, a plan may

not operate in a manner that enables

employees on FMLA leave to defer

compensation from one cafeteria plan

year to a subsequent cafeteria plan year.

See Prop. Treas. Reg. § 1.125–2, Q&A–

5.3

(b) The following example illustrates

this Q&A–5:

Example. Employee A elects health

coverage under a calendar year cafeteria plan

maintained by Employer X. A’s premium for

health coverage is $100 per month

throughout the 12-month period of coverage.

A takes FMLA leave for 12 weeks beginning

on October 31 after making 10 months worth

of premiums totalling $1000 (10 months ×

$100 = $1000). A maintains health coverage

while on FMLA leave. A utilizes the pre-pay

option by cashing-out A’s unused sick days

in order to make the required premium

payments due while A is on FMLA leave.

Because A cannot defer compensation from

one plan year to a subsequent plan year, A

may pre-pay the premiums due in November

and December (i.e., $100 per month) on a

pre-tax basis, but A cannot pre-pay the

premium payment due in January on a pretax basis. If A participates in the cafeteria

plan in the subsequent plan year, A must use

another option (e.g., pay-as-you-go or catchup) to make the premium payment due in

January.

Q–6: Are there special rules

concerning employees taking FMLA

leave who participate in health FSAs

offered under a cafeteria plan?

A–6: (a) In general. (1) A health plan

that is a flexible spending arrangement

(FSA) offered under a cafeteria plan

must conform to the generally

applicable rules in this section

concerning employees who take FMLA

leave. Thus, FMLA requires that an

employee taking FMLA leave be

permitted to—

(i) Continue coverage under a health

FSA while on FMLA leave; or

(ii) Revoke an existing health FSA

election under the cafeteria plan for the

remainder of the coverage period. See

29 CFR 825.209(e).

(2) FMLA also requires the plan to

permit the employee to be reinstated in

the health FSA upon return from FMLA

leave on the same terms as prior to

taking FMLA leave. See 29 CFR

825.215(d) and paragraph (b)(2) of this

Q&A–6. However, reinstatement is at

the employee’s election and under no

circumstances may an employer require
66232 Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Proposed Rules

4Published as a proposed rule at 54 FR 9460

(March 7, 1989).

5Published as a proposed rule at 54 FR 9460

(March 7, 1989).

6Published as a proposed rule at 54 FR 9460

(March 7, 1989).

7Published as a proposed rule at 49 FR 19321

(May 7, 1984).

an employee whose coverage has

terminated while on FMLA leave to

reinstate coverage under a health FSA

upon return from FMLA leave. See 29

CFR 825.214(a).

(b) Uniform Coverage Rule (1) Q&A–

7(b)(2) of § 1.125–24 (the uniform

coverage rule) applies during the FMLA

leave period as long as the employee

continues health coverage. Therefore,

regardless of the payment option

selected under Q&A–3 of this section,

for so long as the employee continues

coverage (or for so long as the employer

continues the coverage of an employee

who fails to make the required

contributions as described in Q&A–

3(a)(2)(iii) of this section), the full

amount of the elected coverage, less any

prior reimbursements, must be available

to the employee at all times, including

the FMLA leave period.

(2)(i) If an employee’s coverage under

the health FSA terminates while the

employee is on FMLA leave, the

employee is not entitled to receive

reimbursements for claims incurred

during the period when the coverage is

terminated. If that employee

subsequently elects to be reinstated in

the health FSA upon return from FMLA

leave for the remainder of the plan year,

the employee may not retroactively elect

health FSA coverage for claims incurred

during the period when the coverage

was terminated. Further, the employee

is not entitled to greater FSA benefits

relative to premiums paid than an

employee who has been continuously

working during the plan year. See 29

CFR 825.216. Therefore, if an employee

elects to be reinstated in a health FSA

upon return from FMLA leave, the

employee’s coverage for the remainder

of the plan year is equal to the

employee’s election for the 12-month

period of coverage (or such shorter

period as provided under § 1.125–2 5),

prorated for the period during the

FMLA leave for which no premiums

were paid, and reduced by prior

reimbursements.

(ii) An employee on FMLA leave has

the right to revoke or change elections

(e.g., because of changes in family

status) under the same terms and

conditions that apply to employees

participating in the cafeteria plan who

are not on FMLA leave. Thus,

notwithstanding the rules described in

paragraph (b)(2)(i) of this Q&A–6, an

employee who returns from FMLA leave

may make a new health FSA election for

the remainder of the plan year if return

from leave without pay constitutes a

change of family status under the

employer’s cafeteria plan.

(3) The following examples illustrate

the rules in this Q&A–6:

Example 1: (a) Employee A elects $1200

worth of coverage under a calendar year

health FSA provided under a cafeteria plan,

with an annual premium of $1200. A is

permitted to pay the $1200 through pre-tax

salary reduction amounts of $100 per month

throughout the 12-month period of coverage.

A incurs no medical expenses prior to April

1. On April 1, A takes FMLA leave after

making three months worth of contributions

totalling $300 (3 months × $100 = $300). The

plan does not permit a revocation of election

on account of a change in family status.

However, pursuant to A’s rights under

FMLA, A elects to terminate coverage upon

going on FMLA leave. Consequently, A

makes no premium payments for the months

of April, May, and June, and A is not entitled

to submit claims or receive reimbursements

for expenses incurred during this period. A

returns from FMLA leave and elects to be

reinstated in the health FSA on July 1.

(b) Under FMLA, A has no greater right to

benefits upon reinstatement than if A had

been continuously working during the plan

year. Therefore, A is reinstated to A’s annual

election (i.e., $1200) prorated for the period

during the FMLA leave for which no

premiums were paid (i.e., reduced for 3

months or 1⁄4 of the plan year) less prior

reimbursements (i.e., $0). Consequently, A’s

coverage for the remainder of the plan year

equals $900. A must also begin making

premium payments of $100 per month for the

remainder of the plan year.

Example 2: Assume the same facts as

Example 1 except that A incurs medical

expenses totaling $200 in February and

obtains reimbursement of these expenses.

The results are the same as in Example 1,

except that A’s coverage for the remainder of

the plan year equals $700.

Example 3: Assume the same facts as

Example 1 except that prior to taking FMLA

leave, A elects to continue health FSA

coverage during the FMLA leave. The plan

permits A (and A elects) to use the catch-up

payment option described in Q&A–3 of this

section, and as further permitted under the

plan, A chooses to repay the $300 in missed

payments on a ratable basis over the

remaining six-month period of coverage (i.e.,

$50 per month). Thus, A’s monthly premium

payments for the remainder of the plan year

will be $150 ($100 + $50).

Q–7: Are employees entitled to nonhealth benefits while taking FMLA

leave?

A–7: FMLA does not require an

employer to maintain an employee’s

non-health benefits (e.g., life insurance)

during FMLA leave. An employee’s

entitlement to benefits other than group

health benefits under a cafeteria plan

during a period of FMLA leave is to be

determined by the employer’s

established policy for providing such

benefits when the employee is on nonFMLA leave (paid or unpaid). See 29

CFR 825.209(h). Therefore, an employee

who takes FMLA leave is entitled to

revoke an election of non-health

benefits under a cafeteria plan to the

same extent employees taking nonFMLA leave are permitted to revoke

elections of non-health benefits under a

cafeteria plan. For example, election

changes are permitted due to changes of

family status or upon enrollment for a

new plan year. See § 1.125–2, Q&A–

6(c) 6 and § 1.125–1, Q&A–8.7 However,

the FMLA regulations provide that, in

certain cases, an employer may continue

an employee’s non-health benefits

under the employer’s cafeteria plan

while the employee is on FMLA leave

to ensure that the employer can meet its

responsibility to provide equivalent

benefits to the employee upon return

from unpaid FMLA. If the employer

continues an employee’s non-health

benefits during FMLA leave, the

employer is entitled to recoup the costs

incurred for paying the employee’s

share of the premiums during the FMLA

leave period. See 29 CFR 825.213(b). In

addition, a cafeteria plan must, as

required by FMLA, permit an employee

whose coverage terminated while on

FMLA leave (either by revocation or

nonpayment of premiums) to be

reinstated in the cafeteria plan on return

from FMLA leave. See 29 CFR

825.214(a) and 825.215(d).

Q–8: How may taxpayers rely on these

proposed regulations?

A–8: (a) The guidance provided by the

questions and answers in this section

may be relied upon to comply with

provisions of section 125 and will be

applied by the Internal Revenue Service

in resolving issues arising under

cafeteria plans and related Internal

Revenue Code sections. If final

regulations are more restrictive than the

guidance in this section, the regulations

will not be applied retroactively. No

inference, however, should be drawn

regarding issues not expressly raised

that may be suggested by a particular

question or answer or by the inclusion

or exclusion of certain questions.

(b) The Department of Labor has

advised the Department of the Treasury,

including the Internal Revenue Service,

that the provisions of this section are

not inconsistent with the provisions of
Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Proposed Rules 66233

FMLA and the Labor Regulations

thereunder.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

[FR Doc. 95–30681 Filed 12–20–95; 8:45 am]

BILLING CODE 4830–01–U

26 CFR Part 1

[EE–106–82]

RIN 1545–AE45

Loans to plan participants

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains

proposed Income Tax Regulations under

section 72(p) of the Internal Revenue

Code relating to loans made from a

qualified employer plan to plan

participants or beneficiaries. Section

72(p) was added by section 236 of the

Tax Equity and Fiscal Responsibility

Act of 1982, and amended by the

Technical Corrections Act of 1982, the

Deficit Reduction Act of 1984, the Tax

Reform Act of 1986 and the Technical

and Miscellaneous Revenue Act of 1988.

These regulations provide guidance to

the public with respect to this

provision, and affect any plan

participant or beneficiary who receives

a loan from a qualified employer plan.

DATES: Written comments and requests

for a public hearing must be received by

March 20, 1996.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (EE–106–82),

Attention: Plan Loans Guidance, room

5228, Internal Revenue Service, POB

7604, Ben Franklin Station, Washington,

DC 20044. In the alternative,

submissions may be hand delivered

between the hours of 8 a.m. and 5 p.m.

to: CC:DOM:CORP:R (EE–106–82),

Courier’s Desk, Internal Revenue

Service, 1111 Constitution Avenue, NW,

Washington, DC.

FOR FURTHER INFORMATION CONTACT:

Vernon S. Carter, of the Office of the

Associate Chief Counsel (Employee

Benefits and Exempt Organizations),

IRS, at (202) 622–6070 (not a toll free

number).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed

amendments to the Income Tax

Regulations (26 CFR Part 1) under

section 72 of the Internal Revenue Code

of 1986 (Code). These amendments are

proposed to conform the regulations to

section 236 of the Tax Equity and Fiscal

Responsibility Act of 1982 (TEFRA),

which added section 72(p) to the Code,

and to the amendments to section 72(p)

made by the Technical Corrections Act

of 1982, the Deficit Reduction Act of

1984, the Tax Reform Act of 1986 and

the Technical and Miscellaneous

Revenue Act of 1988.

Explanation of Provisions

Section 72(p) of the Code generally

provides that an amount received as a

loan from a qualified employer plan by

a participant or beneficiary is treated as

received as a distribution from the plan

for purposes of section 72 (a deemed

distribution), except to the extent

certain conditions are satisfied. For

purposes of section 72, a qualified

employer plan includes a plan that

qualifies under section 401 (relating to

qualified trusts), 403(a) (relating to

qualified annuities) or 403(b) (relating to

tax sheltered annuities), as well as a

plan (whether or not qualified)

maintained by the United States, a State

or a political subdivision thereof, or an

agency or instrumentality thereof. A

qualified employer plan also includes a

plan which was (or was determined to

be) a qualified plan or a government

plan. A loan from a contract purchased

under a qualified employer plan is also

treated as a loan from the plan. Section

72(p) also provides that an assignment

or pledge of (or an agreement to assign

or pledge) any portion of a participant’s

or beneficiary’s interest in a qualified

employer plan is to be treated as a loan

from the plan.

Under section 72(p), a loan from a

qualified employer plan to a participant

or beneficiary is not treated as a

distribution from the plan if the loan

satisfies certain requirements relating to

the terms of the loan and the repayment

schedule, and to the extent the loan

satisfies certain limitations on the

amount loaned. The proposed

regulations require that the loan be

evidenced by an enforceable agreement,

set forth in writing or in another form

that is approved by the Commissioner of

Internal Revenue, that includes terms

that satisfy the statutory requirements.

Thus, the agreement must specify the

amount of the loan, the term of the loan,

and the repayment schedule. The

agreement may be set forth in more than

one document.

If a loan fails to satisfy the repayment

requirements or the enforceable

agreement requirement, the proposed

regulations provide for the balance then

due under the loan to be treated as a

distribution from the plan. This may

occur at the time the loan is made or at

a later date if the loan is not repaid in

accordance with the repayment

schedule. If the loan satisfies the

repayment requirements and the

enforceable agreement requirement, but

at the time the loan is made the amount

of the loan exceeds the statutory

limitation on the amount that is

permitted to be loaned, the proposed

regulations provide that only the excess

amount is a deemed distribution.

One of the repayment requirements is

that the loan be repaid within five years,

unless the loan is used to acquire a

dwelling unit which within a reasonable

time is used as the principal residence

of the participant. The proposed

regulations provide that a principal

residence has the same meaning as

under section 1034 (relating to the

taxation of a sale of a residence) and

that tracing rules established under

section 163(h)(3)(B) (relating to interest

deductions for indebtedness incurred

with respect to the acquisition of a

principal residence) will be used to

determine whether the section

72(p)(2)(B)(ii) exception to the five-year

repayment requirement applies. (Notice

88–74 (1988–2 C.B. 385), sets forth

certain standards applicable under

section 163(h)(3).)

The Tax Reform Act of 1986 amended

section 72(p) to require that, in order for

a loan to not be treated as a distribution,

the loan must be repaid in substantially

level installments (not less frequently

than quarterly) over the term of the loan.

Section 72(p) authorizes regulations to

allow exceptions from this requirement.

Pursuant to this authorization, the

proposed regulations permit loan

repayments to be suspended during a

leave of absence of up to one year, if the

participant’s pay from the employer is

insufficient to service the debt, but only

if the loan is repaid by the latest date

permitted under section 72(p)(2)(B).

If the repayment terms of a loan are

not satisfied after the loan has been

made due to a failure to make a

scheduled loan repayment, the

proposed regulations provide for the

balance then due under the loan to be

deemed to be distributed. The proposed

regulations permit a grace period, to the

extent the grace period does not extend

beyond the end of the calendar quarter

next following the calendar quarter in

which the repayment was scheduled to

be made.

If a loan is treated as a distribution

under section 72(p), the proposed

regulations state that the amount so

distributed is to be treated as a taxable

distribution, subject to the normal rules

of section 72 if the participant’s interest

in the plan includes after-tax

contributions (or other tax basis). A

deemed distribution would also be a

distribution for purposes of the 10