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FLEXIBLE BENEFIT PLAN RULES

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The Internal Revenue Service's proposed regulations clarify that Section 125 flexible benefit plans "are generally the sole method of preserving the nontaxable nature of employer-provided benefits where employees are allowed to elect between taxable compensation and nontaxable benefits."

The proposed regulations contain:

  • New rules for objective testing to determine whether a flexible benefit plan improperly discriminates in favor of highly compensated employees.

  • Added payment flexibility, such as allowing orthodontia expenses to be paid in advance.

  • Requiring Section 125 plan years to be 12 consecutive months.

  • Other previously incorporated regulations, such as those providing guidance on using debit cards, grace periods for using health flexible spending account money and the FSA "use it or lose it" rule.

Source: www.ustreas.gov/press/releases/reports/section125.pdf.