IRS Information Letter Addresses Cafeteria Plan Expense Submission Periods

The IRS has released an information letter addressing cafeteria plan expense submission periods and forfeitures. The letter responds to an inquiry from a cafeteria plan participant who elected to make DCAP salary reductions of $5,000 for the 2017 plan year. Because the participant failed to timely submit documentation for dependent care expenses incurred in 2017, the $5,000 was forfeited in accordance with the Code’s cafeteria plan requirements.

The letter explains that under IRS regulations, cafeteria plans are permitted to limit the period during which expenses may be submitted for reimbursement. The regulations do not specify the length of the submission period. Instead, it is a matter of plan design and should be addressed in the employer’s plan document. However, the regulations require that the plan’s submission period apply to all participants on a uniform basis. The letter also notes that if a cafeteria plan does not operate in accordance with its written terms, employees’ elections between taxable and nontaxable benefits will result in gross income. The letter suggests requesting a copy of the cafeteria plan document for the specific rules applicable to the participant’s plan.

EBIA Comment: This IRS information letter does not break new ground or include any surprises. But like other recent IRS information letters (see, for example, our Checkpoint article), it may be helpful to those on the “front lines” of cafeteria plan administration, who are sometimes asked to explain the reasons for plan operating rules and decisions. Note that employers can reduce the likelihood of forfeitures by offering a grace period or allowing health FSA carryovers. For more information, see EBIA’s Cafeteria Plans manual at Sections X.D.2 (“The Use-or-Lose Rule”), XVI.B (“Grace Periods and the Use-or-Lose Rule”), and XXIII.E (“What Internal Revenue Code Requirements Apply to DCAPs?”).

Contributing Editors: EBIA Staff.