The Wagner Law Group
Wagner Law Group is a nationally recognized practice in the areas of
ERISA and employee benefits, estate planning, employment,
labor and human resources, investment management and real
in 1996, The Wagner Law Group has 28 attorneys engaged
exclusively in employee benefits, estate planning and
employment law. Six of our attorneys are AV rated by
Martindale-Hubbell as having very high to preeminent legal abilities
and ethical standards. The firm is among the largest ERISA boutiques
in the country. Our practice is national in scope, with clients in
more than 40 states and several foreign countries.
Wagner Law Group
Connecticut Ave., N.W.
Fax: (561) 293-3591
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Tampa, FL 33602
Francisco, CA 94104
100 South 4th Street, Suite 550
St. Louis, MO 63102
March 23, 2017
Health and Welfare Law
Clarifies the Rules for Disposal of Cafeteria Plan Forfeitures
has issued guidance on the rules for disposing of unused funds in a
cafeteria plan where the plan's sponsor discontinues its business
operations. In Information Letter 2016-0077, the IRS responds
to a taxpayer's inquiry by confirming that the unused funds will not
revert to the U.S. Treasury but are instead disposed of in accordance
with the plan document.
Background. Regulations issued under Internal
Revenue Code Section 125 provide the requirements for disposing of
unused funds forfeited by a participant under an ongoing plan.
Under these rules, forfeitures may be:
- Retained by
the employer maintaining the plan,
- Used to
defray plan expenses, or
- Returned to
employees (i.e., current plan participants) and allocated
on a reasonable and uniform basis.
The regulations, however, do not address a
situation when the plan sponsor ceases business operations.
An employee had been making regular contributions to his former
employer's cafeteria plan through the time of his termination when
the employer went out of business. The cafeteria plan document
provided that: (i) eligible health care expenses incurred by an
employee before his or her termination of employment could be
reimbursed; and (ii) any unused funds reverted to the plan to pay
Although the employee had unused funds in his
cafeteria plan account at the time of his termination of employment,
he did not have unreimbursed health care expenses. After being
told that because his former employer went out of business, the
unused funds would default to the U.S. Treasury, the employee
contacted IRS to request that it confirm whether this was true.
IRS responded by issuing the Letter.
IRS Letter. The IRS first explained that the cafeteria plan
document at issue required the forfeiture of any unused funds upon an
employee's termination unless the employee had reimbursable health
care expenses on or before the termination of employment and
submitted a claim within 60 days of the termination date.
It then confirmed that the cafeteria plan
document's provisions were consistent with the requirements of Code
Section 125, which provide that unused cafeteria plan contributions
must be forfeited after an employee terminates employment (and no
longer participates in the cafeteria plan).
The IRS concluded by clarifying that nothing in
the law requires the forfeited amounts to default to the U.S.
Treasury in the context of a cafeteria plan termination.
Rather, the disposal of unused funds in a terminated cafeteria plan
would still be dependent on plan provisions (as interpreted by the
plan administrator) under the facts and circumstances at the time of
IRS Information Letter 2016-0077 is available at:
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