EMPLOYER ACTION NEEDED FOR CAFETERIA AND DEPENDENT CARE PLANS 

The IRS has issued proposed cafeteria plan regulations scheduled to take effect on January 1, 2009. Employers will need to amend their cafeteria plan documents by December 31, 2008.

The IRS also issued final dependent care expense regulations that were effective for most plans on January 1, 2008. The regulations include some helpful clarifications and examples that employers may want to incorporate into their dependent care plan documents. 

View a summary of the cafeteria plan regulations.

View a summary of the dependent care expense regulations.

Summary of Cafeteria Plan Regulations 

Under the new regulations, a cafeteria plan:

• cannot be amended retroactively. 
• cannot provide “non-qualified benefits,” including life insurance for a spouse or dependent, even on an after-tax basis.
• must perform prescribed non-discrimination testing.
• can provide participation retroactive to the date of hire (up to 30 days prior to enrollment).
• can use salary reductions from the last paycheck of the year to pay for benefits for first month of the next year.
• can charge participants reasonable administrative fees.
• can use electronic elections following the IRS safe harbor regulations on the use of electronic media.
• can require pre-tax payment of premiums for any health insurance elected.
• cannot require an employee to take health insurance coverage.
• can reimburse participants for individual health insurance premiums (but not through the health flexible spending account (“FSA”)).
• can require a two-year election for vision and dental insurance, with some restrictions.
• can allow "spend down" of a dependent care FSA after termination of employment.
• must include the "maximum amount of elective contributions" for a health FSA in the plan document.
• can allow a health FSA to reimburse a lump-sum payment for orthodontia expenses in advance of services.
• can limit health FSA enrollment to those covered under employer's health plan.
• must comply with stringent debit card rules, including a specific process for recovering ineligible reimbursements.
• can be disqualified for: (a) failure to have a written plan document; (b) not addressing all required elements in the written plan documents or (c) operational failures, including:

Summary of Dependent Care Expense Regulations

The new dependent care expense regulations clarify that:

• expenses for specialty day camps (e.g., for sports or computers) are eligible.
• expenses for summer school and tutoring programs are not eligible.
• expenses an employee is required to pay during a brief absence from work for minor illness or vacation may be eligible.
• a part-time employee’s dependent care expenses are generally eligible only for the days worked.
• dependent care expenses incurred while an employee’s spouse is on bed rest are not eligible unless the spouse is incapable of caring for his or her own hygiene or nutritional needs or requires full-time care for his or her safety or the safety of a child.
• the cost of room and board, employment taxes and application and agency fees for a nanny (if required to obtain the nanny’s services) are eligible.
• forfeited day care deposits are not eligible (because the care was not actually provided).
• the cost for a nanny who cares for a child under age 13 will qualify even though the nanny also cares for an older child.
• amounts paid to a child’s grandparent for dependent care are eligible while amounts paid to the child’s parent (e.g., the employee’s ex-spouse) are not.
• the cost of overnight dependent care is eligible if the employee and spouse work at night.
• the cost of dependent care during the day is eligible if one spouse works at night and needs to sleep during the day while the other spouse is at work.
• only the parent with primary physical custody can receive reimbursement for dependent care expenses and then only for the period in which the child lives with him or her.  A non-custodial parent cannot be reimbursed for dependent care expenses even for the period in which the child resides with him or her.
   

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If you have any questions or need assistance, please contact a member of Oppenheimer's Employee Benefits Group.

This alert is a copyrighted publication produced by Oppenheimer Wolff & Donnelly LLP. The information contained in this alert is of a general nature and is subject to change. Readers should not act without further inquiry and/or consultation with legal counsel.