IRS proposes rules for cafeteria plans

WASHINGTON--The Internal Revenue Service has issued proposed regulations for Section 125 cafeteria plans that allow employees to choose between taxable cash compensation and tax-free benefits such as health care.

Among other measures, the regulations proposed Friday provide employers with guidelines for testing whether their flexible benefit plans improperly discriminate in favor of highly compensated employees.

One test, for example, compares how many non-highly compensated employees vs. highly compensated employees select a specific benefit.

The new regulations also incorporate previously issued guidelines for the use debit cards and health flexible spending arrangements, among other things.

While the IRS is still seeking public comment and a public hearing is scheduled for Nov. 15 on the new regulations, employers now have more specific details on how to meet statutory requirements for setting up their health plans, observers said.

The proposed rules can be viewed at www.ustreas.gov/press/releases/reports/section125.pdf.