Cafeteria plans are being altered at most companies thanks to the new rules issued by the Internal Revenue Service. If employees enroll their eligible dependents on their health insurance plans, the new cafeteria plan rules allow those employees to make immediate tax-free contributions.
According to the IRS Commissioner Doug Shulman, this change was made necessary by the new federal healthcare legislation, which was passed on March 30th, 2010. The commissioner stated that the changes give companies and businesses the chance to offer a benefit that was worth their employees’ while. He further stated that the IRS was prepared to make it as easy as possible for the new changes to be implemented and to include older children of employees in those employees’ tax-favored benefit plans.
Cafeteria plans are tax-favored insurance plans that allow employees to choose from a “cafeteria” of tax-free benefits, cash or taxable benefits.
Notice 2010-38 was issued by the IRS in order to fully explain and interpret the changes. In addition, the notice was designed to provide direction to employers, employees, insurers and other miscellaneous taxpayers.
The expanded tax benefit applies to group insurance plans for active employees and retirees, as well as self-employed workers. Self-employed workers can take advantage of this benefit if they qualify for the self-employed health insurance tax deduction.
Employees’ children who will not reach the age of 27 by the end of the current year qualify for the tax benefit starting from March 30th of this year. It makes no difference whether the children are already covered under the employer’s plan or added at a later date.
For the purposes of this new benefit, the child category includes a son, daughter, stepchild, adopted child or a qualifying foster child. This standard for the age of the child officially replaces the relevant age limits under prior federal tax law; additionally, the old requirement that a child qualifies as a dependent for tax filings is also superseded by this law.
Finally, the notice also states that cafeteria plans provided by employers can now allow employees to start making tax-free contributions for their children’s health insurance coverage even if the cafeteria plan has yet to be amended. Sponsors of plans have until the end of 2010 to amend their plans.