New Trimmings on Your Company Cafeteria Plan

Company cafeteria plans, which allow employees to put aside pre-tax money from their paychecks and use it to pay a variety of health care and other qualifying bills, have just been revamped by the government. New proposed regulations from the IRS have tried to clear up some of the rules regarding where employees can spend their benefits, as well as spelling out who can participate in the program. As an employer, it’s important for you to be up to speed on these changes.

Certain plans offer group term life insurance in excess of $50,000, with the excess over $50,000 taxable to the employee as regular income; the new regulations simplify the calculation of the portion that is taxable to the employee. In addition, the plans can now be used to pay for accident and health coverage for someone who is not related or married to the employee participating in the plan as a taxable benefit to the employee.

The rules regarding participation in plans have also been clarified. Every eligible employee (meaning those employed full-time) must be allowed to participate in the plan, and the majority of contributions cannot be made by or for the benefit of the owner and/or management. Low-level employees must make up a proportion of the total contributions to the plan. The new rules define who is considered management, and this determines if the plan is in compliance with the new rules. The third party (fund administrator, insurance company, etc.) will test the plan each year to see that it complies with these rules.

These proposed regulations are not effective until after 2008; however, business owners can rely on the proposed changes until the final regulations are issued. For more information on the new cafeteria plan benefits, as well as a summary of plan changes, visit treas.gov/press/releases/hp526.htm.