[Federal Register Volume 60, Number 245 (Thursday, December 21, 1995)]
[Proposed Rules]
[Pages 66229-66233]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30681]
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DEPARTMENT OF THE TREASURY
26 CFR Part 1
[EE-20-95]
RIN 1545-AT47
Effect of the Family and Medical Leave Act on the Operation of
Cafeteria Plans
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations relating to
cafeteria plans that reflect changes made by the Family and Medical
Leave Act of 1993. The proposed regulations provide the public with
guidance needed to comply with the Act and affect employees who
participate in cafeteria plans.
DATES: Written comments and requests for a public hearing must be
received by March 20, 1996.
ADDRESSES: Send submissions to: CC:DOM:CORP:R (EE-20-95), room 5228,
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington,
DC 20044. In the alternative, submissions may be hand delivered between
the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (EE-20-95), Courier's
Desk, Internal Revenue Service, 1111 Constitution Avenue NW.,
Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Catherine
Fuller, (202) 622-6080; concerning submissions and the hearing, Mike
Slaughter, (202) 622-8452 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed additions to the Income Tax
Regulations (26 CFR Part 1) under section 125 of the Internal Revenue
Code of 1986 (Code). These additions are proposed to conform the
regulations to the Family and Medical Leave Act of 1993 (FMLA), Public
Law 103-3. FMLA imposes certain requirements on employers regarding
coverage, including family coverage, under group health plans for
employees taking FMLA leave, and regarding the restoration of benefits
to employees who return from FMLA leave. This notice of proposed
rulemaking addresses a number of the principle questions that have been
raised about how these FMLA requirements affect the operation of
cafeteria plans (including flexible spending arrangements) maintained
under section 125 of the Code. The rules in this notice of proposed
rulemaking supplement the proposed Income Tax Regulations under section
125 of the Code. Except as otherwise provided in this notice of
proposed rulemaking, all of the existing rules governing cafeteria
plans, including the nondiscrimination rules, continue to apply.
The requirements pertaining to FMLA leave, including the employer's
obligation to maintain coverage under a group health plan during FMLA
leave and to restore benefits upon return from FMLA leave, are
established by FMLA,
[[Page 66230]]
not the Code. The U.S. Department of Labor, in 29 CFR part 825, has
published rules interpreting the requirements of FMLA, and the
Department of Labor has jurisdiction relating to those rights or
obligations. This notice of proposed rulemaking does not interpret
FMLA; it provides guidance on the cafeteria plan rules that apply to an
employee in circumstances to which FMLA and the Labor Regulations
thereunder also apply. The Department of Labor has advised the
Department of the Treasury, including the Internal Revenue Service
(IRS), that the provisions of this notice of proposed rulemaking do not
conflict with, and are not inconsistent with, the provisions of FMLA or
the Labor Regulations thereunder.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in EO 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) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do
not apply to these regulations, and, therefore, a Regulatory
Flexibility Analysis is not required. Pursuant to section 7805(f) of
the Code, this notice of proposed rulemaking will be submitted to the
Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on small business.
Comments and Requests for a Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (a signed original
and eight (8) copies) that are submitted timely to the IRS. All
comments will be available for public inspection and copying. A public
hearing may be scheduled if requested in writing by a person that
timely submits written comments. If a public hearing is scheduled,
notice of the date, time, and place for the hearing will be published
in the Federal Register.
Drafting Information
The principal author of these regulations is Catherine Fuller,
Office of Associate Chief Counsel (Employee Benefits and Exempt
Organizations). However, other personnel from the IRS and Department of
the Treasury participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority for part 1 continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Par.Section 1.125-3 is added to read as follows:
Sec. 1.125-3 Effect of the Family and Medical Leave Act (FMLA) on the
operation of cafeteria plans.
Q-1: May an employee taking FMLA leave revoke an existing election
of group health plan coverage under a cafeteria plan?
A-1: Yes. An employee taking FMLA leave may revoke an existing
election of group health plan coverage (including a health flexible
spending arrangement (FSA)) under a cafeteria plan for the remaining
portion of the coverage period. See 29 CFR 825.209(e). FMLA also
requires that an employee be permitted to choose to be reinstated in
the group health plan coverage (including a health FSA) provided under
a cafeteria plan upon returning from FMLA leave if the employee's group
health plan coverage terminated while on FMLA leave (either by
revocation or nonpayment of premiums). Such an employee is entitled,
under FMLA, to be reinstated on the same terms as prior to taking FMLA
leave (including family or dependent coverage). See 29 CFR 825.209(e)
and 825.215(d). However, the employee has no greater right to benefits
for the remainder of the plan year than an employee who has been
continuously working during the plan year. In addition to the rights
granted under FMLA, such an employee has the right to revoke or change
elections (e.g., because of changes in family status or significant
cost or coverage changes imposed by a third-party provider) under the
same terms and conditions as are available to employees participating
in the cafeteria plan who are not on FMLA leave.
Q-2: Who is responsible for making premium payments under a
cafeteria plan when an employee on FMLA leave continues group health
plan coverage?
A-2: An employee is entitled to continue group health plan coverage
(including a health FSA) during FMLA leave whether or not provided
under a health FSA or other component of a cafeteria plan. See 29 CFR
825.209(b). An employee making premium payments under a cafeteria plan
who chooses to continue group health plan coverage (including a health
FSA) while on FMLA leave is responsible for the share of group health
premiums that the employee was paying while working, such as amounts
paid pursuant to a salary reduction agreement. The employer must
continue to contribute the share of the cost of the employee's coverage
that the employer was paying before the employee commenced FMLA leave.
See 29 CFR 825.100(b) and 825.210(a).
Q-3: What payment options are required or permitted to be offered
under a cafeteria plan to an employee who continues group health plan
coverage (including a health FSA) while on unpaid FMLA leave, and what
is the tax treatment of these payments?
A-3: (a) In general A cafeteria plan may, on a nondiscriminatory
basis, offer one or more of the following payment options (subject to
the limitations described in paragraph (b) of this Q&A-3) to an
employee who continues group health plan coverage (including a health
FSA) while on unpaid FMLA leave. These options are referred to in this
section as pre-pay, pay-as-you-go and catch-up.
(1) Pre-pay. (i) Under the pre-pay option, a cafeteria plan may
permit an employee to pay, prior to commencement of the FMLA leave
period, the amounts due for the FMLA leave period. However, the Labor
Regulations under FMLA provide that under no circumstances may the
employer mandate that an employee pre-pay the amounts due for the leave
period. See 29 CFR 825.210(c)(3) and (4).
(ii) Contributions under the pre-pay option may be made on a pre-
tax salary reduction basis from any taxable compensation (including the
cashing out of unused sick days or vacation days). These contributions
will not be included in the employee's gross income, provided that all
cafeteria plan requirements are satisfied. For example, see Q&A-5 of
this section regarding restrictions on pre-tax salary reduction
contributions when an employee's FMLA leave spans two cafeteria plan
years.
(iii) Contributions under the pre-pay option may also be made on an
after-tax basis. See Prop. Treas. Reg. Sec. 1.125-1, Q&A-5.\1\
\1\ Published as a proposed rule at 49 FR 19321 (May 7, 1984).
[[Page 66231]]
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(2) Pay-as-you-go. (i) Under the pay-as-you-go option, employees
may pay their share of the premium payments on the same schedule as
payments would be made if the employee were not on leave or under any
other payment schedule permitted by the Labor Regulations at 29 CFR
825.210(c) (i.e., on the same schedule as payments are made under the
Consolidated Omnibus Reconciliation Act of 1985, Public Law 99-272;
under the employer's existing rules for payment by employees on leave
without pay; or under any other system voluntarily agreed to between
the employer and the employee that is not inconsistent with this
section or with 29 CFR 825.210(c)).
(ii) Contributions under the pay-as-you-go option are generally
made by the employee on an after-tax basis. However, contributions may
be made on a pre-tax basis to the extent that the contributions are
made from taxable compensation (e.g., cashing out unused sick or
vacation days) that is due the employee during the leave period, and
provided that all cafeteria plan requirements are satisfied.
(iii) An employer is not required to continue the health coverage
of an employee who fails to make required premium payments while on
FMLA leave. See 29 CFR 825.212. However, if the employer chooses to
continue the health coverage of an employee who fails to make required
premium payments while on FMLA leave, the employer is entitled to
recoup those payments as set forth in paragraph (a)(3)(i) of this Q&A-
3. See also Q&A-6 of this section regarding coverage under a health FSA
when an employee fails to make the required premium payments while on
FMLA leave.
(3) Catch-up. (i) An employer that continues providing group health
coverage to an employee who does not pay premiums on FMLA leave is, to
the extent provided under the Labor Regulations, permitted to utilize
the catch-up option to recoup the employee's share of premium payments.
See, e.g., 29 CFR 825.212(b).
(ii) Where an employee is electing to use the catch-up option, the
employer and the employee must agree in advance of the coverage period
that: the employee elects to continue health coverage while on unpaid
FMLA leave; the employer will assume responsibility for advancing
payment of the premiums on the employee's behalf during the FMLA leave;
and these advance amounts must be paid by the employee when the
employee returns from FMLA leave.
(iii) Contributions under the catch-up option may be made on a pre-
tax salary reduction basis when the employee returns from FMLA leave
from any available taxable compensation (including the cashing out of
unused sick days and vacation days). These contributions will not be
included in the employee's gross income, provided that all cafeteria
plan requirements are satisfied.
(iv) Contributions under the catch-up option may also be made on an
after-tax basis. See Prop. Treas. Reg. Sec. 1.125-1, Q&A-5.\2\
\2\ Published as a proposed rule at 49 FR 19321 (May 7, 1984).
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(b) Exceptions. Cafeteria plans may offer (pursuant to 29 CFR
825.210(c)) one or more of the payment options described in paragraph
(a) of this Q&A-3, with the following exceptions:
(1) The pre-pay option cannot be the sole option offered to
employees on FMLA leave. However, the cafeteria plan may include pre-
payment as an option for employees on FMLA leave, even if such option
is not offered to employees on non-FMLA leave- without-pay.
(2) The catch-up option can be the sole option offered to employees
on FMLA leave if and only if the catch-up option is the sole option
offered to employees on non-FMLA leave-without-pay.
(3) A cafeteria plan cannot offer employees on FMLA leave a choice
of either the pre-pay option or the catch-up option without also
offering the pay-as-you-go option, if the pay-as-you- go option is
offered to employees on non-FMLA leave-without-pay.
(c) Voluntary waiver of employee payments. In addition to the
foregoing payment options, an employer may voluntarily waive, on a
nondiscriminatory basis, the requirement that employees who elect to
continue health coverage while on FMLA leave pay the amounts the
employees would otherwise be required to pay for the leave period.
Q-4: Do the special FMLA requirements concerning an employee who
continues group health plan coverage under a cafeteria plan apply if
the employee is on paid FMLA leave?
A-4: No. The Labor Regulations provide that, if an employee's FMLA
leave is substituted paid leave as described at 29 CFR 825.207 and the
employee continues group health plan coverage while on FMLA leave, the
employee's share of the premiums must be paid by the method normally
used during any paid leave (i.e., salary reduction). See 29 CFR
825.210(b).
Q-5: What restrictions apply to contributions when an employee's
FMLA leave spans two cafeteria plan years?
A-5: (a) Contributions to a cafeteria plan during FMLA leave will
not be included in an employee's gross income, provided that the plan
complies with all cafeteria plan requirements. Among other
requirements, a plan may not operate in a manner that enables employees
on FMLA leave to defer compensation from one cafeteria plan year to a
subsequent cafeteria plan year. See Prop. Treas. Reg. Sec. 1.125-2,
Q&A-5.\3\
\3\ Published as a proposed rule at 54 FR 9460 (March 7, 1989).
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(b) The following example illustrates this Q&A-5:
Example. Employee A elects health coverage under a calendar year
cafeteria plan maintained by Employer X. A's premium for health
coverage is $100 per month throughout the 12-month period of
coverage. A takes FMLA leave for 12 weeks beginning on October 31
after making 10 months worth of premiums totalling $1000 (10 months
x $100 = $1000). A maintains health coverage while on FMLA leave. A
utilizes the pre-pay option by cashing-out A's unused sick days in
order to make the required premium payments due while A is on FMLA
leave. Because A cannot defer compensation from one plan year to a
subsequent plan year, A may pre-pay the premiums due in November and
December (i.e., $100 per month) on a pre-tax basis, but A cannot
pre-pay the premium payment due in January on a pre-tax basis. If A
participates in the cafeteria plan in the subsequent plan year, A
must use another option (e.g., pay-as-you-go or catch-up) to make
the premium payment due in January.
Q-6: Are there special rules concerning employees taking FMLA leave
who participate in health FSAs offered under a cafeteria plan?
A-6: (a) In general. (1) A health plan that is a flexible spending
arrangement (FSA) offered under a cafeteria plan must conform to the
generally applicable rules in this section concerning employees who
take FMLA leave. Thus, FMLA requires that an employee taking FMLA leave
be permitted to--
(i) Continue coverage under a health FSA while on FMLA leave; or
(ii) Revoke an existing health FSA election under the cafeteria
plan for the remainder of the coverage period. See 29 CFR 825.209(e).
(2) FMLA also requires the plan to permit the employee to be
reinstated in the health FSA upon return from FMLA leave on the same
terms as prior to taking FMLA leave. See 29 CFR 825.215(d) and
paragraph (b)(2) of this Q&A-6. However, reinstatement is at the
employee's election and under no circumstances may an employer require
[[Page 66232]]
an employee whose coverage has terminated while on FMLA leave to
reinstate coverage under a health FSA upon return from FMLA leave. See
29 CFR 825.214(a).
(b) Uniform Coverage Rule (1) Q&A-7(b)(2) of Sec. 1.125-2\4\ (the
uniform coverage rule) applies during the FMLA leave period as long as
the employee continues health coverage. Therefore, regardless of the
payment option selected under Q&A-3 of this section, for so long as the
employee continues coverage (or for so long as the employer continues
the coverage of an employee who fails to make the required
contributions as described in Q&A-3(a)(2)(iii) of this section), the
full amount of the elected coverage, less any prior reimbursements,
must be available to the employee at all times, including the FMLA
leave period.
\4\ Published as a proposed rule at 54 FR 9460 (March 7, 1989).
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(2)(i) If an employee's coverage under the health FSA terminates
while the employee is on FMLA leave, the employee is not entitled to
receive reimbursements for claims incurred during the period when the
coverage is terminated. If that employee subsequently elects to be
reinstated in the health FSA upon return from FMLA leave for the
remainder of the plan year, the employee may not retroactively elect
health FSA coverage for claims incurred during the period when the
coverage was terminated. Further, the employee is not entitled to
greater FSA benefits relative to premiums paid than an employee who has
been continuously working during the plan year. See 29 CFR 825.216.
Therefore, if an employee elects to be reinstated in a health FSA upon
return from FMLA leave, the employee's coverage for the remainder of
the plan year is equal to the employee's election for the 12-month
period of coverage (or such shorter period as provided under
Sec. 1.125-2 \5\), prorated for the period during the FMLA leave for
which no premiums were paid, and reduced by prior reimbursements.
\5\ Published as a proposed rule at 54 FR 9460 (March 7, 1989).
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(ii) An employee on FMLA leave has the right to revoke or change
elections (e.g., because of changes in family status) under the same
terms and conditions that apply to employees participating in the
cafeteria plan who are not on FMLA leave. Thus, notwithstanding the
rules described in paragraph (b)(2)(i) of this Q&A-6, an employee who
returns from FMLA leave may make a new health FSA election for the
remainder of the plan year if return from leave without pay constitutes
a change of family status under the employer's cafeteria plan.
(3) The following examples illustrate the rules in this Q&A-6:
Example 1: (a) Employee A elects $1200 worth of coverage under a
calendar year health FSA provided under a cafeteria plan, with an
annual premium of $1200. A is permitted to pay the $1200 through
pre-tax salary reduction amounts of $100 per month throughout the
12-month period of coverage. A incurs no medical expenses prior to
April 1. On April 1, A takes FMLA leave after making three months
worth of contributions totalling $300 (3 months x $100 = $300).
The plan does not permit a revocation of election on account of a
change in family status. However, pursuant to A's rights under FMLA,
A elects to terminate coverage upon going on FMLA leave.
Consequently, A makes no premium payments for the months of April,
May, and June, and A is not entitled to submit claims or receive
reimbursements for expenses incurred during this period. A returns
from FMLA leave and elects to be reinstated in the health FSA on
July 1.
(b) Under FMLA, A has no greater right to benefits upon
reinstatement than if A had been continuously working during the
plan year. Therefore, A is reinstated to A's annual election (i.e.,
$1200) prorated for the period during the FMLA leave for which no
premiums were paid (i.e., reduced for 3 months or \1/4\ of the plan
year) less prior reimbursements (i.e., $0). Consequently, A's
coverage for the remainder of the plan year equals $900. A must also
begin making premium payments of $100 per month for the remainder of
the plan year.
Example 2: Assume the same facts as Example 1 except that A
incurs medical expenses totaling $200 in February and obtains
reimbursement of these expenses. The results are the same as in
Example 1, except that A's coverage for the remainder of the plan
year equals $700.
Example 3: Assume the same facts as Example 1 except that prior
to taking FMLA leave, A elects to continue health FSA coverage
during the FMLA leave. The plan permits A (and A elects) to use the
catch-up payment option described in Q&A-3 of this section, and as
further permitted under the plan, A chooses to repay the $300 in
missed payments on a ratable basis over the remaining six-month
period of coverage (i.e., $50 per month). Thus, A's monthly premium
payments for the remainder of the plan year will be $150 ($100 +
$50).
Q-7: Are employees entitled to non-health benefits while taking
FMLA leave?
A-7: FMLA does not require an employer to maintain an employee's
non-health benefits (e.g., life insurance) during FMLA leave. An
employee's entitlement to benefits other than group health benefits
under a cafeteria plan during a period of FMLA leave is to be
determined by the employer's established policy for providing such
benefits when the employee is on non-FMLA leave (paid or unpaid). See
29 CFR 825.209(h). Therefore, an employee who takes FMLA leave is
entitled to revoke an election of non-health benefits under a cafeteria
plan to the same extent employees taking non-FMLA leave are permitted
to revoke elections of non-health benefits under a cafeteria plan. For
example, election changes are permitted due to changes of family status
or upon enrollment for a new plan year. See Sec. 1.125-2, Q&A-6(c) \6\
and Sec. 1.125-1, Q&A-8.\7\ However, the FMLA regulations provide that,
in certain cases, an employer may continue an employee's non-health
benefits under the employer's cafeteria plan while the employee is on
FMLA leave to ensure that the employer can meet its responsibility to
provide equivalent benefits to the employee upon return from unpaid
FMLA. If the employer continues an employee's non-health benefits
during FMLA leave, the employer is entitled to recoup the costs
incurred for paying the employee's share of the premiums during the
FMLA leave period. See 29 CFR 825.213(b). In addition, a cafeteria plan
must, as required by FMLA, permit an employee whose coverage terminated
while on FMLA leave (either by revocation or nonpayment of premiums) to
be reinstated in the cafeteria plan on return from FMLA leave. See 29
CFR 825.214(a) and 825.215(d).
\6\ Published as a proposed rule at 54 FR 9460 (March 7, 1989).
\7\ Published as a proposed rule at 49 FR 19321 (May 7, 1984).
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Q-8: How may taxpayers rely on these proposed regulations?
A-8: (a) The guidance provided by the questions and answers in this
section may be relied upon to comply with provisions of section 125 and
will be applied by the Internal Revenue Service in resolving issues
arising under cafeteria plans and related Internal Revenue Code
sections. If final regulations are more restrictive than the guidance
in this section, the regulations will not be applied retroactively. No
inference, however, should be drawn regarding issues not expressly
raised that may be suggested by a particular question or answer or by
the inclusion or exclusion of certain questions.
(b) The Department of Labor has advised the Department of the
Treasury, including the Internal Revenue Service, that the provisions
of this section are not inconsistent with the provisions of
[[Page 66233]]
FMLA and the Labor Regulations thereunder.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
[FR Doc. 95-30681 Filed 12-20-95; 8:45 am]
BILLING CODE 4830-01-U
