Important Change To Cafeteria Plan “Use-It-Or-Lose-It Rule”
June 2005
The IRS has made an important change in the rule that has required employees’ unused cafeteria plan (also known as flexible benefit or section 125 plan) salary reductions to be forfeited at year end. Under the newly announced rule, such unused amounts can be carried over into the next year and used to reimburse eligible expenses incurred during the two-and-one-half month period following the year end. However, in order to use the new rule, your plan will have to be amended. (If your employees are covered by health savings accounts, you may wish to delay the implementation of this new rule until the IRS has issued further guidance. There are certain conflicts between the new rule and the rules affecting health savings accounts.) Please let us know by mail, email or a phone call whether you wish to amend your cafeteria plan to use the new rule in 2005 and later years.
If you have any questions, please contact a member of our Compensation Planning & Employee Benefits Group.