Opinion ID: 2570481
Heading Depth: 1
Heading Rank: 10

Heading: IRS Regulations

Text: NEA-T claims that the District must comply with IRS regulations with respect to cafeteria plans. NEA-T points to proposed regulation § 1.125-2(b)(7) which, according to NEA-T, states that where there is a surplus, an employee whose compensation was initially reduced to purchase the coverage should receive a cash refund. The District responds by correctly observing that the cited IRS regulation cited applies to flexible spending accounts (FSA's). The District offers both FSA's and health insurance plans under its cafeteria plan. The divisible surpluses here were generated by health insurance plans, not FSA's. Even if the surpluses were generated by FSA's, the regulation does not support NEA-T's position. Under the tax code, employer contributions to insurance programs are not treated as NEA-T asserts. 26 C.F.R. § 1.106-1 (1999) states that employer contributions are treated as funds given directly from the employer to the insurer so that the employee pays no income tax on the benefit. Significantly, NEA-T admits that the Rider conformed to this treasury regulation. NEA-T also admits the premium surplus can be returned to those who paid the premium and created the surplus. The question again is: Who paid the premiums? The trial court ruled that the question of who paid the premiums and created the surplus requires interpretation of the PA. That ruling was correct and is consistent with our approach in NEA-Coffeyville. See 268 Kan. at 395-96. The Rider does not state whether the premiums are paid from employer contributions or employee salary reductions. The cafeteria plan is dependent upon the PA. If any written instrument obligates the District to pay any surplus to the insureds, it is the PA. See NEA-Coffeyville, 268 Kan. at 395-402 (analyzing the negotiated agreement to determine entitlement to the divisible surplus).