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The Wagner Law Group

The 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 estate. 

 

Established 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.

 

 

 

 

Contact Info

The Wagner Law Group

 

  Integrity | Excellence

  

Boston 

Tel: (617) 357-5200 

Fax: (617) 357-5250 

99 Summer Street 

13th Floor

Boston, MA 02110

 

Washington, D.C.

Tel: (202) 969-2800

  Fax: (202) 969-2568

800 Connecticut Ave., N.W.

Suite 810

Washington, D.C. 20006

 


Palm Beach Gardens 

Tel: (561) 293-3590
Fax: (561) 293-3591
7108 Fairway Drive
Suite 125
Palm Beach Gardens, FL 33418

   

Tampa

Tel: (813) 603-2959

Fax: (813) 603-2961

101 East Kennedy Boulevard

Suite 2140
Tampa, FL  33602 

 

San Francisco

Tel: (415) 625-0002

Fax: (415) 358-8300

300 Montgomery Street

Suite 600

San Francisco, CA 94104

 

St. Louis

Tel: (314) 236-0065

Fax: (314) 236-5743
100 South 4th Street, Suite 550
St. Louis, MO  63102 

 

 

www.wagnerlawgroup.com

 

 

 

March 23, 2017

 

 Health and Welfare Law Alert

 

 

 

     IRS Clarifies the Rules for Disposal of Cafeteria Plan Forfeitures

 

 

 

 

 

The IRS 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.

 

 

 

Facts.  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 expenses.

 

 

 

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 plan's termination. 

 

 

 

IRS Information Letter 2016-0077 is available at: https://www.irs.gov/pub/irs-wd/16-0077.pdf

 

 

 

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This Newsletter is provided for information purposes by The Wagner Law Group to clients and others who may be interested in the subject matter, and may not be relied upon as specific legal advice.  This material is not to be construed as legal advice or legal opinions on specific facts. Under the Rules of the Supreme Judicial Court of Massachusetts, this material may be considered advertising.