Tax Treatment of Cafeteria Plans

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 1 [TD 8921] RIN 1545-AY23

TITLE: Tax Treatment of Cafeteria Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations relating to
section 125 cafeteria plans. The final regulations clarify the
circumstances under which a cafeteria plan may permit an employee to
change his or her cafeteria plan election with respect to accident
or health coverage, group-term life insurance coverage, dependent
care assistance and adoption assistance during the plan year.

DATES: Effective Date: These regulations are effective January 10,
2001. Applicability Date: See the Scope of Regulations and Effective
Date portion of this preamble.

FOR FURTHER INFORMATION CONTACT: Christine L. Keller or Janet A.
Laufer at (202) 622-6080 (not a toll-free number)..Section 125(f)
provides that the following are not qualified benefits (even though
they are generally excludable from gross income under an express
provision of the Internal Revenue Code): products advertised,
marketed, or offered as long-term care insurance; medical savings
accounts under section 106(b); qualified scholarships under section
117; educational assistance programs under section 127; and fringe
benefits under section 132.

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments to the Income Tax Regulations (26
CFR part 1) under section 125 of the Internal Revenue Code (Code).
Section 125 generally provides that an employee in a cafeteria plan
will not have an amount included in gross income solely because the
employee may choose among two or more benefits consisting of cash
and qualified benefits. A qualified benefit generally is any benefit
that is excludable from gross income under an express provision of
the Code, including coverage under an employer-provided accident or
health plan under sections 105 and 106, group-term life insurance
under section 79, elective contributions under a qualified cash or
deferred arrangement within the meaning of section 401(k), dependent
care assistance under section 129, and adoption assistance under
section 137. Qualified 1 benefits can be provided under a cafeteria
plan either through insured arrangements or arrangements that are
not insured..49 FR 19321 (May 7, 1984) and 54 FR 9460 (March 7,
1989), respectively.

TD 8878 at 65 FR 15548 (March 23, 2000). These final regulations
were preceded by temporary regulations issued in 1997. See 62 FR
60196 (November 7, 1997) and 62 FR 60165 (November 7, 1997).
REG-117162-99 at 65 FR 15587 (March 23, 2000).

In 1984 and 1989, proposed regulations were published relating to
cafeteria plans. In general, the 1984 and 1989 proposed regulations
require that, for benefits to 2 be provided on a pre-tax basis under
section 125, an employee may make changes during a plan year only in
certain circumstances. Specifically, Q&A-8 of '1.125-1 and Q&A-6(b),
(c), and (d) of '1.125-2 permit participants to make benefit
election changes during a plan year pursuant to changes in cost or
coverage, changes in family status, and separation from service.

In 2000, final regulations were issued permitting a participant in a
cafeteria plan 3 to change his or her accident or health coverage
election during a period of coverage in specific circumstances such
as where special enrollment rights arise under section 9801(f)
(added to the Code by the Health Insurance Portability and
Accountability Act of 1996 (HIPAA)(110 Stat. 1936), where
eligibility for Medicare or Medicaid is gained or lost, or where a
court issues a judgment, decree, or order requiring that an
employee's child or foster child who is a dependent receive health
coverage. In addition, the final regulations permit an employee to
change his or her accident or health coverage election or group-term
life insurance election if certain change in status rules are
satisfied.

On the same day that the final regulations were issued, proposed
regulations 4.For example, an employee might seek to increase group-
term life insurance due to a marriage (because of the need to
provide income to the new spouse in the event that the chief wage-
earner dies) or to decrease group-term life insurance due to a
marriage (because the new spouse may be a wage-earner who can
support the family in the event that the employee dies). were also
issued containing change in status rules that apply to other types
of qualified benefits (i.e., dependent care assistance and adoption
assistance) and describing the circumstances under which changes in
the cost or coverage of qualified benefits provide a basis for
changes in cafeteria plan elections. The IRS and Treasury received
written comments on the proposed regulations and held a public
hearing on August 17, 2000. Having considered the comments and the
statements made at the hearing, the IRS and Treasury revise the
final regulations and adopt the proposed regulations as modified by
this Treasury decision. The comments and revisions are discussed
below.

Explanation of Provisions

1. Changes in the March 2000 Final Regulations

With respect to group-term life insurance and disability coverage,
the final regulations issued earlier this year provided flexibility
by stating that, in the event of a change in an employee's marital
status or a change in the employment status of the employee's spouse
or dependent, an employee may elect either to increase such coverage
or to decrease such coverage. Commentators recommended that this
rule 5 also apply in the case of birth, adoption, placement for
adoption, or death. The argument was made that in these other
situations -- because these types of coverage are generally designed
to provide income, instead of expense reimbursements -- it may.

be appropriate for the employee to seek to increase or decrease the
coverage. In accordance with these recommendations and in the
interest of simplicity, the final regulations have been modified to
allow participants to increase or decrease these types of coverage
for all change of status events. Further, as also suggested by
commentators, the final regulations have been modified to expand the
rule to apply to coverage to which section 105(c) (which is coverage
for permanent loss or loss of use of a member or function of the
body) applies.

Commentators requested clarification as to how the election change
rules with respect to special enrollment rights under section
9801(f) (enacted under HIPAA) apply to a participant who marries if
the group health plan allows the participant to change his or her
health coverage election retroactively to the date of the marriage.
In response to this comment, language has been added to an example
in the final regulations to clarify that an election change can be
funded through salary reduction under a cafeteria plan only on a
prospective basis, except for the retroactive enrollment right under
section 9801(f) that applies in the case of an election made within
30 days of a birth, adoption, or placement for adoption.

With respect to accident or health coverage, the consistency rule in
the final regulations requires that any employee who wishes to
decrease or cancel coverage because he or she becomes eligible for
coverage under a spouse's or dependent's plan due to a marital or
employment change in status can do so only if he or she actually
obtains coverage under that other plan. Commentators requested
clarification as to the type of proof an employer must receive to
satisfy this rule, expressing concern. that a plan could not
implement a change on a timely basis because of a need to obtain
proper proof of the other coverage. An example in the final
regulations has been revised to make it clear that employers may
generally rely on an employee's certification that the employee has
or will obtain coverage under the other plan (assuming that the
employer has no reason to believe that the employee certification is
incorrect ).

The final regulations allow a participant to change his or her
election if a judgment, decree or order resulting from a divorce,
legal separation, annulment, or change in legal custody requires
that an employee's spouse, former spouse, or other individual
provide accident or health coverage for the employee's child or for
a foster child who is a dependent of the employee. The final
regulations were modified to clarify that the participant can only
change his or her election if the spouse, former spouse, or other
individual actually provides accident or health coverage for the
child.

2. Changes From the March 2000 Proposed Regulations

The final regulations being issued today are generally consistent
with the proposed regulations that were issued earlier this year,
but include various modifications.

Cost and coverage rules

The proposed regulations included rules allowing election changes in
connection with a significant increase in cost or a significant
curtailment in coverage, irrespective of whether the plan is insured
or not insured. These cost and coverage rules (and the other rules
in paragraph (f) of '1.125-4) do not apply with respect to.A
flexible spending arrangement (FSA) is defined in section 106(c)(2).
Under section 6 106(c)(2), an FSA is generally a benefit program
under which the maximum reimbursement reasonably available for
coverage is less than 500% of the value of the coverage. A health
FSA is an accident or health plan that is an FSA coverage under a
health FSA. However, all of the rules in paragraphs (a) through (e)
6 and paragraph (g) of the final regulations under '1.125-4 do apply
with respect to coverage under a health FSA. One modification
reflected in the final regulations is to clarify that the cost
increase rules apply when the amount of an employee's elective
contributions under section 125 increases either due to the employee
contributing a larger portion of the total cost of the qualified
benefits plan (which might occur, for example, if part-time
employees pay a larger portion of a plan's cost and the employee
switches to part-time status) or due to an increase in the total
cost of the qualified benefits plan.

In response to comments, modifications were also made to allow
election changes during a period of coverage when there is a
significant decrease in the cost of a qualified benefits plan or in
the cost of a benefits package option under the qualified benefits
plan, as well as when there is a significant increase. Under the
regulations as modified, if there is a significant decrease in the
cost of a qualified benefits plan during the plan year, the final
regulations permit a cafeteria plan to allow all employees, even
those who have not previously participated in the cafeteria plan, to
elect to participate in the qualified benefits plan through the
cafeteria plan. Similarly, if there is a significant decrease in the
cost of a benefits package option during the plan year, the final
regulations permit a cafeteria plan to allow all eligible employees
to elect that. option (including employees who have elected another
option, as well as those who have not previously participated in the
cafeteria plan).

Further, in response to comments, modifications were also made to
allow midyear election changes when there is a significant
improvement in the coverage provided under a benefit package option,
as well as when there is a new benefit package option offered under
the plan.

Commentators also requested clarification as to whether a cafeteria
plan could allow participants to drop coverage in response to a
significant change in the cost or coverage of a qualified benefit.
The final regulations clarify this issue, and provide that, if there
is no other similar coverage, employees may drop coverage (including
a change from family to single coverage) in response either to an
increase in the cost of a qualified benefit or to a loss of
coverage. The regulations also permit an employee to elect similar
coverage in response to a significant curtailment in coverage.
However, the regulations do not allow an employee to drop coverage
altogether if there is a significant curtailment in coverage that
does not constitute a loss of coverage. The regulations list the
curtailments that are treated as a loss of coverage for this
purpose, and include a complete loss of coverage (such as when an
HMO ceases to be available in an area where an individual resides,
or when an employee or a covered member of the employee's family
loses all coverage under a benefit package option by reason of a
lifetime or annual limitation). In addition, the final regulations
allow a cafeteria plan, in.Such discretion may be exercised on a
case by case basis, provided that the exercise of discretion
satisfies section 125(c) which prohibits discrimination in favor of
highly compensated participants.

Any reduction in coverage that affects a specific individual must
not violate the prohibition in section 9802 against discrimination
on the basis of health status (and parallel HIPAA provisions in the
Employee Retirement Income Security Act of 1974 and the Public
Health Service Act). See §§54.9802-1 and 54.9802-1T(b)(2).

its discretion , to treat certain other events as a loss of
coverage. These events include 7 a substantial decrease in medical
care providers (such as a major hospital ceasing to be a member of a
preferred provider network or a substantial decease in the
physicians participating in a preferred provider network or an HMO),
a reduction in the benefits for a specific type of medical condition
or treatment with respect to which the employee or the employee's
spouse or dependent is currently in a course of treatment , or any
other 8 similar fundamental loss of coverage.

For purposes of these rules, a significant curtailment occurs only
if there is an overall reduction in coverage provided so as to
constitute reduced coverage generally (i.e., a reduction in the fair
market value of the coverage). Therefore, in most cases, the loss of
one particular physician in a network does not constitute a
significant curtailment.

In response to comments, the rule under the proposed regulations
that allowed an employee to change his or her election in response
to a change made under a spouse's or dependent's plan has been
clarified and broadened. Under the final regulations, the rule
applies to coverage available from any employer plan, including any
plan of the same employer and any plan of a different employer. In
addition, the regulations have been modified to allow an employee to
elect to participate in a.Added to the Social Security Act by
section 4901 of the Balanced Budget Act of 1997, Public Law 105-33
(August 5, 1997).

See §1.125-3, published as a proposed rule at 60 FR 66229
(December 21, 1995).

cafeteria plan if the employee (or the employee's spouse or
dependent) loses coverage under a group health plan sponsored by a
governmental or educational institution, such as a state program
under the State Children Health Insurance Program (SCHIP) . The 9
regulations do not allow a cafeteria plan participant to cease
participation in a cafeteria plan if he or she becomes eligible for
SCHIP coverage during the year because of a concern that such a rule
would violate a fundamental principle of Title XXI of the Social
Security Act that SCHIP coverage not supplant existing public or
private coverage.

Scope of Regulations and Effective Date

These final regulations address all of the changes in status for
which a cafeteria plan may permit election changes, including
changes with respect to accident or health coverage, group-term life
insurance, dependent care assistance and adoption assistance. In
addition, the regulations contain guidance concerning election
changes that are permitted because of changes in the cost or
coverage of a qualified benefit plan.

Unless specifically noted, these regulations do not override other
cafeteria plan requirements such as the rules pertaining to health
flexible spending arrangements, and the rules concerning the Family
and Medical Leave Act (Public Law 103-3 (107 Stat. 6)) . 10.11

The changes made by these regulations with respect to the March 2000
final regulations are applicable for cafeteria plan years beginning
on or after January 1, 2001, except that the clarification made in
paragraph (d)(1)(ii)(B) of these regulations (relating to a spouse,
former spouse, or other individual obtaining accident or health
coverage for an employee's child in response to a judgment, decree,
or order) is applicable for cafeteria plan years beginning on or
after January 1, 2002. With respect to the change made in paragraph
(d)(1)(ii)(B) of these regulations, taxpayers may, until January 1,
2002, rely on either paragraph (d)(1)(ii)(B) of these regulations or
the final regulations published in March 2000 (as §1.125-4(d)
(1)(ii)).

The changes made from the March 2000 proposed regulations (including
the rules relating to cost or coverage in paragraph (f) of these
regulations) are applicable for cafeteria plan years beginning on or
after January 1, 2002. With respect to these changes (including the
rules relating to cost or coverage in paragraph (f) of these
regulations), taxpayers may, until January 1, 2002, rely on either
these regulations, the proposed regulations published in March 2000
(under §1.125-4), or the cost or coverage change rules in the
1989 proposed regulations (at § 1.125-2 (Q&A-6(b)).

Special Analyses

It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations, and
because the regulation does not impose a collection of information
on small entities, the.12 Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to section 7805(f) of the
Internal Revenue Code, these regulations will be submitted to the
Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on small business.

Drafting Information

The principal authors of these regulations are Christine L. Keller
and Janet A. Laufer, Office of Division Counsel/ Associate Chief
Counsel (Tax Exempt and Government Entities). However, other
personnel from the IRS and Treasury Department participated in their
development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements. Adoption of
Amendments to the Regulations Accordingly, 26 CFR part 1 is amended
as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in
part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. 1.125-4 is amended by:

1. Revising paragraphs (b)(2) Example 2 (ii).

2. Revising paragraph (c)(1) and adding paragraph (c)(2)(vi).

3. Adding a sentence to the end of paragraph (c)(3)(i)..13

4. Removing the last sentence in paragraph (c)(3)(iii) and adding a
sentence in its place.

5. Adding paragraph (c)(4) Example 3 (iii).

6. Revising paragraph (c)(4) Example 4 (ii) and adding paragraph
(iii).

7. Adding paragraph (c)(4) Example 9 and (c)(4) Example 10.

8. Revising paragraph (d)(1)(ii).

9. Revising paragraphs (f), (g), (i)(3) and (i)(4).

10. Adding a sentence at the end of paragraph (i)(8), and adding
paragraph (i)(9).

11. Revising paragraph (j). The additions and revisions read as
follows: §1.125-4 Permitted election changes.

(a) Election changes. A cafeteria plan may permit an employee to
revoke an election during a period of coverage and to make a new
election only as provided in paragraphs (b) through (g) of this
section. Section 125 does not require a cafeteria plan to permit any
of these changes. See paragraph (h) of this section for special
provisions relating to qualified cash or deferred arrangements, and
paragraph (i) of this section for special definitions used in this
section.

(b) Special enrollment rights -- (1) In general. A cafeteria plan
may permit an employee to revoke an election for coverage under a
group health plan during a period of coverage and make a new
election that corresponds with the special enrollment rights
provided in section 9801(f)..14 (2) Examples. The following examples
illustrate the application of this paragraph

(b):

Example 1.

(i) Employer M provides health coverage for its employees pursuant
to a plan that is subject to section 9801(f). Under the plan,
employees may elect either employee-only coverage or family
coverage. M also maintains a calendar year cafeteria plan under
which qualified benefits, including health coverage, are funded
through salary reduction. M's employee, A, is married to B and they
have a child, C. In accordance with M's cafeteria plan, Employee A
elects employee-only health coverage before the beginning of the
calendar year. During the year, A and B adopt a child, D. Within 30
days thereafter, A wants to revoke A's election for employee-only
health coverage and obtain family health coverage for A's spouse, C,
and D as of the date of D's adoption. Employee A satisfies the
conditions for special enrollment of an employee with a new
dependent under section 9801(f)(2), so that A may enroll in family
coverage under M's accident or health plan in order to provide
coverage effective as of the date of D's adoption.

(ii) M's cafeteria plan may permit A to change A's salary reduction
election to family coverage for salary not yet currently available.
The increased salary reduction is permitted to reflect the cost of
family coverage from the date of adoption......(A's adoption of D is
also a change in status, and the election of family coverage is
consistent with that change in status. Thus, under paragraph (c) of
this section, M's cafeteria plan could permit A to elect family
coverage prospectively in order to cover B, C, and D for the
remaining portion of the period of coverage.) Example 2.

(i) The employer plans and permissible coverage are the same as in
Example 1. Before the beginning of the calendar year, Employee E
elects employee-only health coverage under M's cafeteria plan.
Employee E marries F during the plan year. F's employer, N, offers
health coverage to N's employees, and, prior to the marriage, F had
elected employee-only coverage. Employee E wants to revoke the
election for employee-only coverage under M's cafeteria plan, and is
considering electing family health coverage under M's plan or
obtaining family health coverage under N's plan.

(ii) M's cafeteria plan may permit E to change E's salary reduction
election to reflect the change to family coverage under M's accident
or health plan because the marriage would result in special
enrollment rights under section 9801(f), pursuant to which an
election of family coverage under M's accident or health plan would
be required to be effective no later than the first day of the first
calendar month beginning after the completed request for enrollment
is received by the plan. Since no retroactive coverage is required
in the event of marriage under section 9801(f), E's salary reduction
election may only be changed on a prospective basis.(E's marriage to
F is. also a change in status under paragraph (c) of this section,
as illustrated in Example 1 of paragraph (c)(4) of this section.)

(c) Changes in status -- (1) Change in status rule. A cafeteria plan
may permit an employee to revoke an election during a period of
coverage with respect to a qualified benefits plan (defined in
paragraph (i)(8) of this section) to which this paragraph (c)
applies and make a new election for the remaining portion of the
period (referred to in this section as an election change)if, under
the facts and circumstances

(i) A change in status described in paragraph (c)(2) of this section
occurs; and

(ii) The election change satisfies the consistency rule of paragraph
(c)(3) of this section.

(iii) Application to other qualified benefits. [Reserved]

(2) Change in status events. The following events are changes in
status for purposes of this paragraph (c):

(i) Legal marital status. Events that change an employee's legal
marital status, including the following: marriage; death of spouse;
divorce; legal separation; and annulment.

(ii) Number of dependents. Events that change an employee's number
of dependents, including the following: birth; death; adoption; and
placement for adoption. (iii) Employment status. Any of the
following events that change the employment status of the employee,
the employee's spouse, or the employee's dependent: a termination or
commencement of employment; a strike or lockout; a. commencement of
or return from an unpaid leave of absence; and a change in worksite.
In addition, if the eligibility conditions of the cafeteria plan or
other employee benefit plan of the employer of the employee, spouse,
or dependent depend on the employment status of that individual and
there is a change in that individual's employment status with the
consequence that the individual becomes (or ceases to be) eligible
under the plan, then that change constitutes a change in employment
under this paragraph (c) (e.g., if a plan only applies to salaried
employees and an employee switches from salaried to hourly-paid with
the consequence that the employee ceases to be eligible for the
plan, then that change constitutes a change in employment status
under this paragraph (c)(2)(iii)).

(iv) Dependent satisfies or ceases to satisfy eligibility
requirements. Events that cause an employee's dependent to satisfy
or cease to satisfy eligibility requirements for coverage on account
of attainment of age, student status, or any similar circumstance.

(v) Residence. A change in the place of residence of the employee,
spouse, or dependent.

(vi) Adoption assistance. For purposes of adoption assistance
provided through a cafeteria plan, the commencement or termination
of an adoption proceeding.

(3) Consistency rule -- (i) Application to accident or health
coverage and group-term life insurance. An election change satisfies
the requirements of this paragraph (c)(3) with respect to accident
or health coverage or group-term life insurance only if the election
change is on account of and corresponds with a change in status that
affects eligibility for coverage under an employer's plan. A change
in status that affects. eligibility under an employer's plan
includes a change in status that results in an increase or decrease
in the number of an employee's family members or dependents who may
benefit from coverage under the plan.

(ii) Application to other qualified benefits. [Reserved]

(iii) Application of consistency rule. If the change in status is
the employee's divorce, annulment or legal separation from a spouse,
the death of a spouse or dependent, or a dependent ceasing to
satisfy the eligibility requirements for coverage, an employee's
election under the cafeteria plan to cancel accident or health
insurance coverage for any individual other than the spouse involved
in the divorce, annulment or legal separation, the deceased spouse
or dependent, or the dependent that ceased to satisfy the
eligibility requirements for coverage, respectively, fails to
correspond with that change in status. Thus, if a dependent dies or
ceases to satisfy the eligibility requirements for coverage, the
employee's election to cancel accident or health coverage for any
other dependent, for the employee, or for the employee's spouse
fails to correspond with that change in status. In addition, if an
employee, spouse, or dependent gains eligibility for coverage under
a family member plan (as defined in paragraph (i)(5) of this
section) as a result of a change in marital status under paragraph
(c)(2)(i) of this section or a change in employment status under
paragraph (c)(2)(iii) of this section, an employee's election under
the cafeteria plan to cease or decrease coverage for that individual
under the cafeteria plan corresponds with that change in status only
if coverage for that individual becomes applicable or is increased
under the family member plan. With respect to group-term life
insurance and disability. coverage (as defined in paragraph (i)(4)
of this section), an election under a cafeteria plan to increase
coverage (or an election to decrease coverage) in response to a
change in status described in paragraph (c)(2) of this section is
deemed to correspond with that change in status as required by
paragraph (c)(3)(i) of this section.

(iv) Exception for COBRA. If the employee, spouse, or dependent
becomes eligible for continuation coverage under the group health
plan of the employee's employer as provided in section 4980B or any
similar state law, a cafeteria plan may permit the employee to elect
to increase payments under the employer's cafeteria plan in order to
pay for the continuation coverage.

(4) The following examples illustrate the application of this
paragraph (c): Example 1.

(i) Employer M provides health coverage (including a health FSA) for
its employees through its cafeteria plan. Before the beginning of
the calendar year, Employee A elects employee-only health coverage
under M's cafeteria plan and elects salary reduction contributions
to fund coverage under the health FSA. Employee A marries B during
the year. Employee B's employer, N, offers health coverage to N's
employees (but not including any health FSA), and, prior to the
marriage, B had elected employee-only coverage. Employee A wants to
revoke the election for employee-only coverage, and is considering
electing family health coverage under M's plan or obtaining family
health coverage under N's plan.

(ii) Employee A's marriage to B is a change in status under
paragraph (c)(2)(i) of this section, pursuant to which B has become
eligible for coverage under M's health plan under paragraph (c)(3)
(i) of this section. Two possible election changes by A correspond
with the change in status: Employee A may elect family health
coverage under M's plan to cover A and B; or A may cancel coverage
under M's plan, if B elects family health coverage under N's plan to
cover A and B. Thus, M's cafeteria plan may permit A to make either
election change.

(iii) Employee A may also increase salary reduction contributions to
fund coverage for B under the health FSA..19 Example 2.

(i) Employee C, a single parent, elects family health coverage under
a calendar year cafeteria plan maintained by Employer O. Employee C
and C's 21-year old child, D, are covered under O's health plan.
During the year, D graduates from college. Under the terms of the
health plan, dependents over the age of 19 must be full-time
students to receive coverage. Employee C wants to revoke C's
election for family health coverage and obtain employee-only
coverage under O's cafeteria plan.

(ii) D's loss of eligibility for coverage under the terms of the
health plan is a change in status under paragraph (c)(2)(iv) of this
section. A revocation of C's election for family coverage and new
election for employee-only coverage corresponds with the change in
status. Thus, O's cafeteria plan may permit C to elect employee-only
coverage.

Example 3.

(i) Employee E is married to F and they have one child, G. Employee
E is employed by Employer P, and P maintains a calendar year
cafeteria plan that allows employees to elect no health coverage,
employee-only coverage, employee-plus-one-dependent coverage, or
family coverage. Under the plan, before the beginning of the
calendar year, E elects family health coverage for E, F, and G. E
and F divorce during the year and F loses eligibility for coverage
under P's plan. G does not lose eligibility for health coverage
under P's plan upon the divorce. E now wants to revoke E's election
under the cafeteria plan and elect no coverage.

(ii) The divorce is a change in status under paragraph (c)(2)(i). A
change in the cafeteria plan election to cancel health coverage for
F is consistent with that change in status. However, an election
change to cancel E's or G's health coverage does not satisfy the
consistency rule under paragraph (c)(3)(iii) of this section
regarding cancellation of coverage for an employee's other
dependents in the event of divorce. Therefore, the cafeteria plan
may not permit E to elect no coverage. However, an election to
change to employee-plus-one-dependent health coverage would
correspond with the change in status, and thus the cafeteria plan
may permit E to elect employee-plus-one-dependent health coverage.

(iii) In addition, under paragraph (f)(4) of this section, if F
makes an election change to cover G under F's employer's plan, then
E may make a corresponding change to elect employee-only coverage
under P's cafeteria plan.

Example 4.

(i) Employer R maintains a calendar year cafeteria plan under which
full-time employees may elect coverage under one of three benefit
package options provided under an accident or health plan: an
indemnity option or either of two HMO options for employees who work
in the respective service areas of the two HMOs. Employee A, who
works in the service area of HMO #1, elects the HMO #1 option.
During the year, A is transferred to another work location which is
outside the HMO #1 service area and inside the HMO #2 service
area..20

(ii) The transfer is a change in status under paragraph (c)(2)(iii)
of this section (relating to a change in worksite), and, under the
consistency rule in paragraph (c)(3) of this section, the cafeteria
plan may permit A to make an election change to elect the indemnity
option or HMO #2 or to cancel accident or health coverage.

(iii) The change in work location has no effect on A's eligibility
under R's health FSA, so no change in A's health FSA is authorized
under this paragraph (c).

Example 5.(i) Employer S maintains a calendar year cafeteria plan
that allows employees to elect coverage under an accident or health
plan providing indemnity coverage and coverage under a health FSA.
Prior to the beginning of the calendar year, Employee B elects
employee-only indemnity coverage, and elects salary reduction
contributions of $600 during the year to fund coverage under the
health FSA for up to $600 of reimbursements for the year. Employee
B's spouse, C, has employee-only coverage under an accident or
health plan maintained by C's employer. During the year, C
terminates employment and loses coverage under that plan. B now
wants to elect family coverage under S's accident or health plan and
increase B's FSA election.

(ii) C's termination of employment is a change in status under
paragraph (c)(2)(iii) of this section, and the election change
satisfies the consistency rule of paragraph (c)(3) of this section.
Therefore, the cafeteria plan may permit B to elect family coverage
under S's accident or health plan and to increase B's FSA coverage.

Example 6.

(i) Employer T provides group-term life insurance coverage as
described under section 79. Under T's plan, an employee may elect
life insurance coverage in an amount up to $50,000. T also maintains
a calendar year cafeteria plan under which qualified benefits,
including the group-term life insurance coverage, are funded through
salary reduction.Employee D has a spouse and a child. Before the
beginning of the year, D elects $10,000 of group-term life insurance
coverage. During the year, D is divorced.

(ii) The divorce is a change in status under paragraph (c)(2)(i) of
this section. Under paragraph (c)(3)(iii) of this section, either an
increase or a decrease in coverage is consistent with this change in
status. Thus, T's cafeteria plan may permit D to increase or to
decrease D's group-term life insurance coverage.

Example 7.

(i) Employee E is married to F and they have one child, G. Employee
E's employer, U, maintains a cafeteria plan under which employees
may elect no coverage, employee-only coverage, or family coverage
under a group health plan maintained by U, and may make a separate
vision coverage election under the plan. Before the beginning of the
calendar year, E elects family health coverage and no vision
coverage under U's cafeteria plan. Employee F's employer, V,
maintains a cafeteria.21 plan under which employees may elect no
coverage, employee-only coverage, or family coverage under a group
health plan maintained by V, and may make a separate vision coverage
election under the plan. Before the beginning of the calendar year,
F elects no health coverage and employee-only vision coverage under
V's plan. During the year, F terminates employment with V and loses
vision coverage under V's plan. Employee E now wants to elect family
vision coverage under U's group health plan.

(ii) F's termination of employment is a change in status under
paragraph (c)(2)(iii) of this section, and the election change
satisfies the consistency rule of paragraph (c)(3) of this section.
Therefore, U's cafeteria plan may permit E to elect family vision
coverage (covering E and G as well as F) under U's group health
plan.

Example 8.

(i) Before the beginning of the year, Employee H elects to
participate in a cafeteria plan maintained by H's employer, W.
However, in order to change the election during the year so as to
cancel coverage, and by prior understanding with W, H terminates
employment and resumes employment one week later.

(ii) In this Example 8, under the facts and circumstances, a
principal purpose of the termination of employment was to alter the
election, and reinstatement of employment was understood at the time
of termination. Accordingly, H does not have a change in status
under paragraph (c)(2)(iii) of this section.

(iii) However, H's termination of employment would constitute a
change in status, permitting a cancellation of coverage during the
period of unemployment, if H's original cafeteria plan election for
the period of coverage was reinstated upon resumption of employment
(for example, if W's cafeteria plan contains a provision requiring
an employee who resumes employment within 30 days, without any other
intervening event that would permit a change in election, to return
to the election in effect prior to termination of employment).

(iv) If, instead, H terminates employment and cancels coverage
during a period of unemployment, and then returns to work more than
30 days following termination of employment, the cafeteria plan may
permit H the option of returning to the election in effect prior to
termination of employment or making a new election under the plan.
Alternatively, the cafeteria plan may prohibit H from returning to
the plan during that plan year.

Example 9.

(i) Employee A has one child, B. Employee A's employer, X, maintains
a calendar year cafeteria plan that allows employees to elect
coverage under a dependent care FSA. Prior to the beginning of the
calendar year, A elects salary reduction contributions of $4,000
during the year to fund coverage under the dependent. care FSA for
up to $4,000 of reimbursements for the year. During the year, B
reaches the age of 13, and A wants to cancel coverage under the
dependent care FSA.

(ii) When B turns 13, B ceases to satisfy the definition of
qualifying individual under section 21(b)(1) of the Internal Revenue
Code. Accordingly, B's attainment of age 13 is a change in status
under paragraph (c)(2)(iv) of this section that affects A's
employment-related expenses as defined in section 21(b)(2).
Therefore, A may make a corresponding change under X's cafeteria
plan to cancel coverage under the dependent care FSA.

Example 10.

(i) Employer Y maintains a calendar year cafeteria plan under which
full-time employees may elect coverage under either an indemnity
option or an HMO. Employee C elects the employee-only indemnity
option. During the year, C marries D. D has two children from a
previous marriage, and has family group health coverage in a
cafeteria plan sponsored by D's employer, Z. C wishes to change from
employee-only indemnity coverage to HMO coverage for the family. D
wishes to cease coverage in Z's group health plan and certifies to Z
that D will have family coverage under C's plan (and Z has no reason
to believe the certification is incorrect).

(ii) The marriage is a change in status under paragraph (c)(2)(i) of
this section. Under the consistency rule in paragraph (c)(3) of this
section, Y's cafeteria plan may permit C to change his or her salary
reduction contributions to reflect the change from employee-only
indemnity to HMO family coverage, and Z may permit D to revoke
coverage under Z's cafeteria plan.

(d) Judgment, decree, or order -- (1) Conforming election change.
This paragraph (d) applies to a judgment, decree, or order (order)
resulting from a divorce, legal separation, annulment, or change in
legal custody (including a qualified medical child support order as
defined in section 609 of the Employee Retirement Income Security
Act of 1974 (Public Law 93-406 (88 Stat. 829))) that requires
accident or health coverage for an employee's child or for a foster
child who is a dependent of the employee . A cafeteria plan will not
fail to satisfy section 125 if it --

(i) Changes the employee's election to provide coverage for the
child if the order requires coverage for the child under the
employee's plan; or.23

(ii) Permits the employee to make an election change to cancel
coverage for the child if:

(A) The order requires the spouse, former spouse, or other
individual to provide coverage for the child; and

(B) That coverage is, in fact, provided.

(2) Example. The following example illustrates the application of
this paragraph

(d):

Example.

(i) Employer M maintains a calendar year cafeteria plan that allows
employees to elect no health coverage, employee-only coverage,
employee-plus-one- dependent coverage, or family coverage. M's
employee, A, is married to B and they have one child, C. Before the
beginning of the year, A elects employee-only health coverage.
Employee A divorces B during the year and, pursuant to A's divorce
agreement with B, M's health plan receives a qualified medical child
support order (as defined in section 609 of the Employee Retirement
Income Security Act of 1974) during the plan year. The order
requires M's health plan to cover C.

(ii) Under this paragraph (d), M's cafeteria plan may change A's
election from employee-only health coverage to employee-plus-one-
dependent coverage in order to cover C.

(e) Entitlement to Medicare or Medicaid. If an employee, spouse, or
dependent who is enrolled in an accident or health plan of the
employer becomes entitled to coverage (i.e., becomes enrolled) under
Part A or Part B of Title XVIII of the Social Security Act
(Medicare)(Public Law 89-97 (79 Stat. 291)) or Title XIX of the
Social.24 Security Act (Medicaid)(Public Law 89-97 (79 Stat. 343)),
other than coverage consisting solely of benefits under section 1928
of the Social Security Act (the program for distribution of
pediatric vaccines), a cafeteria plan may permit the employee to
make a prospective election change to cancel or reduce coverage of
that employee, spouse, or dependent under the accident or health
plan. In addition, if an employee, spouse, or dependent who has been
entitled to such coverage under Medicare or Medicaid loses
eligibility for such coverage, the cafeteria plan may permit the
employee to make a prospective election to commence or increase
coverage of that employee, spouse, or dependent under the accident
or health plan.

(f) Significant cost or coverage changes -- (1) In general.
Paragraphs (f)(2) through (5) of this section set forth rules for
election changes as a result of changes in cost or coverage. This
paragraph (f) does not apply to an election change with respect to a
health FSA (or on account of a change in cost or coverage under a
health FSA).

(2) Cost changes - - (i) Automatic changes. If the cost of a
qualified benefits plan increases (or decreases) during a period of
coverage and, under the terms of the plan, employees are required to
make a corresponding change in their payments, the cafeteria plan
may, on a reasonable and consistent basis, automatically make a
prospective increase (or decrease) in affected employees= elective
contributions for the plan.

(ii) Significant cost changes. If the cost charged to an employee
for a benefit package option (as defined in paragraph (i)(2) of this
section) significantly increases or significantly decreases during a
period of coverage, the cafeteria plan may permit the. employee to
make a corresponding change in election under the cafeteria plan.
Changes that may be made include commencing participation in the
cafeteria plan for the option with a decrease in cost, or, in the
case of an increase in cost, revoking an election for that coverage
and, in lieu thereof, either receiving on a prospective basis
coverage under another benefit package option providing similar
coverage or dropping coverage if no other benefit package option
providing similar coverage is available. For example, if the cost of
an indemnity option under an accident or health plan significantly
increases during a period of coverage, employees who are covered by
the indemnity option may make a corresponding prospective increase
in their payments or may instead elect to revoke their election for
the indemnity option and, in lieu thereof, elect coverage under
another benefit package option including an HMO option (or drop
coverage under the accident or health plan if no other benefit
package option is offered).

(iii) Application of cost changes. For purposes of paragraphs (f)(2)
(i) and (ii) of this section, a cost increase or decrease refers to
an increase or decrease in the amount of the elective contributions
under the cafeteria plan, whether that increase or decrease results
from an action taken by the employee (such as switching between
full-time and part-time status) or from an action taken by an
employer (such as reducing the amount of employer contributions for
a class of employees).

(iv) Application to dependent care. This paragraph (f)(2) applies in
the case of a dependent care assistance plan only if the cost change
is imposed by a dependent care provider who is not a relative of the
employee. For this purpose, a relative is an. individual who is
related as described in section 152(a)(1) through (8), incorporating
the rules of section 152(b)(1) and (2).

(3) Coverage changes - - (i) Significant curtailment without loss of
coverage. If an employee (or an employee's spouse or dependent) has
a significant curtailment of coverage under a plan during a period
of coverage that is not a loss of coverage as described in paragraph
(f)(3)(ii) of this section (for example, there is a significant
increase in the deductible, the copay, or the out-of-pocket cost
sharing limit under an accident or health plan), the cafeteria plan
may permit any employee who had been participating in the plan and
receiving that coverage to revoke his or her election for that
coverage and, in lieu thereof, to elect to receive on a prospective
basis coverage under another benefit package option providing
similar coverage. Coverage under a plan is significantly curtailed
only if there is an overall reduction in coverage provided under the
plan so as to constitute reduced coverage generally. Thus, in most
cases, the loss of one particular physician in a network does not
constitute a significant curtailment.

(ii) Significant curtailment with loss of coverage. If an employee
(or the employee's spouse or dependent) has a significant
curtailment that is a loss of coverage, the plan may permit that
employee to revoke his or her election under the cafeteria plan and,
in lieu thereof, to elect either to receive on a prospective basis
coverage under another benefit package option providing similar
coverage or to drop coverage if no similar benefit package option is
available. For purposes of this paragraph (f)(3)(ii), a loss of
coverage means a complete loss of coverage under the benefit package
option or other coverage option (including the elimination of a
benefits.27 package option, an HMO ceasing to be available in the
area where the individual resides, or the individual losing all
coverage under the option by reason of an overall lifetime or annual
limitation). In addition, the cafeteria plan may, in its discretion,
treat the following as a loss of coverage - -

(A) A substantial decrease in the medical care providers available
under the option (such as a major hospital ceasing to be a member of
a preferred provider network or a substantial decrease in the
physicians participating in a preferred provider network or an HMO);

(B) A reduction in the benefits for a specific type of medical
condition or treatment with respect to which the employee or the
employee's spouse or dependent is currently in a course of
treatment; or

(C) Any other similar fundamental loss of coverage.

(iii) Addition or improvement of a benefit package option . If a
plan adds a new benefit package option or other coverage option, or
if coverage under an existing benefit package option or other
coverage option is significantly improved during a period of
coverage, the cafeteria plan may permit eligible employees (whether
or not they have previously made an election under the cafeteria
plan or have previously elected the benefit package option) to
revoke their election under the cafeteria plan and, in lieu thereof,
to make an election on a prospective basis for coverage under the
new or improved benefit package option.

(4) Change in coverage under another employer plan. A cafeteria plan
may permit an employee to make a prospective election change that is
on account of and.28 corresponds with a change made under another
employer plan (including a plan of the same employer or of another
employer) if - -

(i) The other cafeteria plan or qualified benefits plan permits
participants to make an election change that would be permitted
under paragraphs (b) through (g) of this section (disregarding this
paragraph (f)(4)); or

(ii) The cafeteria plan permits participants to make an election for
a period of coverage that is different from the period of coverage
under the other cafeteria plan or qualified benefits plan.

(5) Loss of coverage under other group health coverage. A cafeteria
plan may permit an employee to make an election on a prospective
basis to add coverage under a cafeteria plan for the employee,
spouse, or dependent if the employee, spouse, or dependent loses
coverage under any group health coverage sponsored by a governmental
or educational institution, including the following - -

(i) A State's children's health insurance program (SCHIP) under
Title XXI of the Social Security Act;

(ii) A medical care program of an Indian Tribal government (as
defined in section 7701(a)(40)), the Indian Health Service, or a
tribal organization

(iii) A State health benefits risk pool; or

(iv) A Foreign government group health plan.

(6) Examples. The following examples illustrate the application of
this paragraph (f):.29 Example 1.

(i) A calendar year cafeteria plan is maintained pursuant to a
collective bargaining agreement for the benefit of Employer M's
employees. The cafeteria plan offers various benefits, including
indemnity health insurance and a health FSA. As a result of mid-year
negotiations, premiums for the indemnity health insurance are
reduced in the middle of the year, insurance co-payments for office
visits are reduced under the indemnity plan by an amount which
constitutes a significant benefit improvement, and an HMO option is
added.

(ii) Under these facts, the reduction in health insurance premiums
is a reduction in cost. Accordingly, under paragraph (f)(2)(i) of
this section, the cafeteria plan may automatically decrease the
amount of salary reduction contributions of affected participants by
an amount that corresponds to the premium change. However, the plan
may not permit employees to change their health FSA elections to
reflect the mid-year change in copayments under the indemnity plan.

(iii) Also, the decrease in co-payments is a significant benefit
improvement and the addition of the HMO option is an addition of a
benefit package option. Accordingly, under paragraph (f)(3)(ii) of
this section, the cafeteria plan may permit eligible employees to
make an election change to elect the indemnity plan or the new HMO
option. However, the plan may not permit employees to change their
health FSA elections to reflect differences in co-payments under the
HMO option.

Example 2.

(i) Employer N sponsors an accident or health plan under which
employees may elect either employee-only coverage or family health
coverage. The 12-month period of coverage under N's cafeteria plan
begins January 1, 2001. N's employee, A, is married to B. Employee A
elects employee-only coverage under N's plan. B's employer, O,
offers health coverage to O's employees under its accident or health
plan under which employees may elect either employee-only coverage
or family coverage. O's plan has a 12-month period of coverage
beginning September 1, 2001. B maintains individual coverage under
O's plan at the time A elects coverage under N's plan, and wants to
elect no coverage for the plan year beginning on September 1, 2001,
which is the next period of coverage under O's accident or health
plan. A certifies to N that B will elect no coverage under O's
accident or health plan for the plan year beginning on September 1,
2001 and N has no reason to believe that A's certification is
incorrect.

(ii) Under paragraph (f)(4)(ii) of this section, N's cafeteria plan
may permit A to change A's election prospectively to family coverage
under that plan effective September 1, 2001.

Example 3.

(i) Employer P sponsors a calendar year cafeteria plan under which
employees may elect either employee-only or family health coverage.
Before the beginning of the year, P's employee, C, elects family
coverage under P's cafeteria plan..30 C also elects coverage under
the health FSA for up to $200 of reimbursements for the year to be
funded by salary reduction contributions of $200 during the year. C
is married to D, who is employed by Employer Q. Q does not maintain
a cafeteria plan, but does maintain an accident or health plan
providing its employees with employee-only coverage. During the
calendar year, Q adds family coverage as an option under its health
plan. D elects family coverage under Q's plan, and C wants to revoke
C's election for health coverage and elect no health coverage under
P's cafeteria plan for the remainder of the year.

(ii) Q's addition of family coverage as an option under its health
plan constitutes a new coverage option described in paragraph (f)(3)
(ii) of this section. Accordingly, pursuant to paragraph (f)(4)(i)
of this section, P's cafeteria plan may permit C to revoke C's
health coverage election if D actually elects family health coverage
under Q's accident or health plan. Employer P's plan may not permit
C to change C's health FSA election.

Example 4.

(i) Employer R maintains a cafeteria plan under which employees may
elect accident or health coverage under either an indemnity plan or
an HMO. Before the beginning of the year, R's employee, E elects
coverage under the HMO at a premium cost of $100 per month. During
the year, E decides to switch to the indemnity plan, which charges a
premium of $140 per month.

(ii) E's change from the HMO to indemnity plan is not a change in
cost or coverage under this paragraph (f), and none of the other
election change rules under paragraphs (b) through (e) of this
section apply.

(iii) Although R's health plan may permit E to make the change from
the HMO to the indemnity plan, R's cafeteria plan may not permit E
to make an election change to reflect the increased premium.
Accordingly, if E switches from the HMO to the indemnity plan, E may
pay the $40 per month additional cost on an after-tax basis.

Example 5.

(i) Employee A is married to Employee B and they have one child, C.
Employee A's employer, M, maintains a calendar year cafeteria plan
that allows employees to elect coverage under a dependent care FSA.
Child C attends X's on site child care center at an annual cost of
$3,000. Prior to the beginning of the year, A elects salary
reduction contributions of $3,000 during the year to fund coverage
under the dependent care FSA for up to $3,000 of reimbursements for
the year. Employee A now wants to revoke A's election of coverage
under the dependent care FSA, because A has found a new child care
provider.

(ii) The availability of dependent care services from the new child
care provider (whether the new provider is a household employee or
family member of A or B or a person who is independent of A and B)
is a significant change in coverage similar to a.31 benefit package
option becoming available. Because the FSA is a dependent care FSA
rather than a health FSA, the coverage rules of this section apply
and M's cafeteria plan may permit A to elect to revoke A's previous
election of coverage under the dependent care FSA, and make a
corresponding new election to reflect the cost of the new child care
provider.

Example 6.

(i) Employee D is married to Employee E and they have one child, F.
Employee D's employer, N, maintains a calendar year cafeteria plan
that allows employees to elect coverage under a dependent care FSA.
Child F is cared for by Y, D's household employee, who provides
child care services five days a week from 9 a.m. to 6 p.m. at an
annual cost in excess of $5,000. Prior to the beginning of the year,
D elects salary reduction contributions of $5,000 during the year to
fund coverage under the dependent care FSA for up to $5,000 of
reimbursements for the year. During the year, F begins school and,
as a result, Y's regular hours of work are changed to five days a
week from 3 p.m. to 6 p.m. Employee D now wants to revoke D's
election under the dependent care FSA, and make a new election under
the dependent care FSA to an annual cost of $4,000 to reflect a
reduced cost of child care due to Y's reduced hours.

(ii) The change in the number of hours of work performed by Y is a
change in coverage. Thus, N's cafeteria plan may permit D to reduce
D's previous election under the dependent care FSA to $4,000.

Example 7.

(i) Employee G is married to Employee H and they have one child, J.
Employee G's employer, O, maintains a calendar year cafeteria plan
that allows employees to elect coverage under a dependent care FSA.
Child J is cared for by Z, G's household employee, who is not a
relative of G and who provides child care services at an annual cost
of $4,000. Prior to the beginning of the year, G elects salary
reduction contributions of $4,000 during the year to fund coverage
under the dependent care FSA for up to $4,000 of reimbursements for
the year. During the year, G raises Z's salary. Employee G now wants
to revoke G's election under the dependent care FSA, and make a new
election under the dependent care FSA to an annual amount of $4,500
to reflect the raise.

(ii) The raise in Z's salary is a significant increase in cost under
paragraph (f)(2)(ii) of this section, and an increase in election to
reflect the raise corresponds with that change in status. Thus, O's
cafeteria plan may permit G to elect to increase G's election under
the dependent care FSA.

Example 8.

(i) Employer P maintains a calendar year cafeteria plan that allows
employees to elect employee-only, employee plus one dependent, or
family coverage under an indemnity plan. During the middle of the
year, Employer P gives its employees the option to select employee-
only or family coverage from an HMO plan. P's employee,.32 J, who
had elected employee plus one dependent coverage under the indemnity
plan, decides to switch to family coverage under the HMO plan.

(ii) Employer P's midyear addition of the HMO option is an addition
of a benefit package option. Under paragraph (f) of this section,
Employee J may change his or her salary reduction contributions to
reflect the change from indemnity to HMO coverage, and also to
reflect the change from employee plus one dependent to family
coverage (however, an election of employee-only coverage under the
new option would not correspond with the addition of a new option).
Employer P may not permit J to change J's health FSA election.

(g) Special requirements relating to the Family and Medical Leave
Act. An employee taking leave under the Family and Medical Leave Act
(FMLA) (Public Law 103-3 (107 Stat. 6)) may revoke an existing
election of accident or health plan coverage and make such other
election for the remaining portion of the period of coverage as may
be provided for under the FMLA.

(h) Elective contributions under a qualified cash or deferred
arrangement. The provisions of this section do not apply with
respect to elective contributions under a qualified cash or deferred
arrangement (within the meaning of section 401(k)) or employee
contributions subject to section 401(m). Thus, a cafeteria plan may
permit an employee to modify or revoke elections in accordance with
section 401(k) and (m) and the regulations thereunder.

(i) Definitions. Unless otherwise provided, the definitions in
paragraphs (i)(1) though (8) of this section apply for purposes of
this section.

(1) Accident or health coverage. Accident or health coverage means
coverage under an accident or health plan as defined in regulations
under section 105..33

(2) Benefit package option. A benefit package option means a
qualified benefit under section 125(f) that is offered under a
cafeteria plan, or an option for coverage under an underlying
accident or health plan (such as an indemnity option, an HMO option,
or a PPO option under an accident or health plan).

(3) Dependent. A dependent means a dependent as defined in section
152, except that, for purposes of accident or health coverage, any
child to whom section 152(e) applies is treated as a dependent of
both parents, and, for purposes of dependent care assistance
provided through a cafeteria plan, a dependent means a qualifying
individual (as defined in section 21(b)(1)) with respect to the
employee.

(4) Disability coverage. Disability coverage means coverage under an
accident or health plan that provides benefits due to personal
injury or sickness, but does not reimburse expenses incurred for
medical care (as defined in section 213(d)) of the employee or the
employee's spouse and dependents. For purposes of this section,
disability coverage includes payments described in section 105(c).

(5) Family member plan. A family member plan means a cafeteria plan
or qualified benefit plan sponsored by the employer of the
employee's spouse or the employee's dependent.

(6) FSA, health FSA. An FSA means a qualified benefits plan that is
a flexible spending arrangement as defined in section 106(c)(2) . A
health FSA means a health or accident plan that is an FSA.

(7) Placement for adoption. Placement for adoption means placement
for adoption as defined in regulations under section 9801..34

(8) Qualified benefits plan. A qualified benefits plan means an
employee benefit plan governing the provision of one or more
benefits that are qualified benefits under section 125(f). A plan
does not fail to be a qualified benefits plan merely because it
includes an FSA, assuming that the FSA meets the requirements of
section 125 and the regulations thereunder.

(9) Similar coverage. Coverage for the same category of benefits for
the same individuals (e.g., family to family or single to single).
For example, two plans that provide coverage for major medical are
considered to be similar coverage. For purposes of this definition,
a health FSA is not similar coverage with respect to an accident or
health plan that is not a health FSA. A plan may treat coverage by
another employer, such as a spouse's or dependent's employer, as
similar coverage..35 (j) Effective date -- (1) General rule. Except
as provided in paragraph (j)(2) of this section, this section is
applicable for cafeteria plan years beginning on or after January 1,
2001.

(2) Delayed effective date for certain provisions. The following
provisions are applicable for cafeteria plan years beginning on or
after January 1, 2002: paragraph (c) of this section to the extent
applicable to qualified benefits other than an accident or health
plan or a group-term life insurance plan; paragraph (d)(1)(ii)(B) of
this section (relating to a spouse, former spouse, or other
individual obtaining accident or health coverage for an employee's
child in response to a judgment, decree, or order); paragraph (f) of
this section (rules for election changes as a result of cost or
coverage changes); and paragraph (i)(9) of this section (defining
similar coverage)..Par. 3. Section 1.125-4T is removed.

Deputy Commissioner of Internal Revenue

Approved:

Assistant Secretary of the Treasury (Tax Policy)

SEARCH:

You can search the entire Tax Professionals section, or all of Uncle Fed's Tax*Board. For a more focused search, put your search word(s) in quotes.

2001 Regulations Main | IRS Regulations Main | Home