When an employer offers a benefit plan and makes employee contribution deductions after taxes are deducted, they are relatively free to allow whatever additions or deletions they wish. When employers offer a "Cafeteria Plan", on the other hand, they are utilizing Section 125 of the Internal Revenue Code (IRC) which allows certain benefits to be provided on a pretax basis under a single plan. To comply with IRC 125, there are several standards that must be met. There are rules regarding who can participate, flexible spending account rules, nondiscrimination requirements, definitions of unqualified and qualified plans and rules on how and when employees must make benefit elections.
Cafeteria plan elections must be made before the beginning of the plan year. The elections must state the benefit chosen, the corresponding salary reduction, and the election must be for a 12 month period. Once elected, the benefit must be used or lost. The subject of making elections and subsequent changes has been covered in the IRS temporary regulations. The temporary regulations were issued in November of 1997, and are now final regulations.

Generally speaking, in accordance with Temporary IRS Reg 1.125-4T, the employee, their spouse or one of their dependents must experience a change in status to qualify for an election change. Changes in status include a legal change in marital status (to include legal separation), or a change in the number of dependents - via a birth, adoption or death. Changes in status also occur when the employee, their spouse or dependent experiences a change in employment status, or a substantial change in their work schedule. If a change occurs that makes a dependent newly qualified or newly disqualified from a benefit plan, such as becoming a full time student or quitting school, the situation will meet the requirement of a change in status. Changes in residence or work location of the dependent, employee or spouse also qualify as reasons to change elections.

Finally, if an independent, third party provider makes significant increases or decreases in the cost or coverage, a cafeteria plan may allow a participant to revoke an existing election.
 

Please Note: This material is provided as general information and is not a substitute for legal or other professional advice. Contact the Knowledge Center for more information.

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