Proposed Regulations Regarding Sections 89 & 125

The Internal Revenue Service today issued proposed regulations affecting accident and health plans, group-term life insurance and other welfare benefit plans, such as dependent care assistance program. The regulations, under Sections 89 and 125 of the Internal Revenue Code of 1986, provide nondiscrimination rules and qualification requirements for these plans and affect most employers with benefit plans.

Section 89 is intended, in part, to limit the tax-favored treatment of benefits provided by employers to highly compensated employees but not to nonhighly compensated employees. It is intended to discourage employers from offering health plans and other welfare benefits that unfairly favor highly compensated employees in the coverage or extent of their benefits. Another principal objective of this legislation is to extend health coverage for employees not now covered.

Today's regulations reflect changes to the law made as late as Nov. 10, 1988, by the Technical and Miscellaneous Revenue Act of 1988; they also reflect changes made by the Tax Reform act of 1986, the Tax Reform Act of 1984 and the Revenue Act of 1978. Because the regulations were not available by the effective date of Section 89 -- Jan. 1, 1989 -- they contain generous transition rules for plan sponsors who reasonably tried to comply with the law.

Today's regulations provide guidance in question-and-answer format in three general areas: nondiscrimination rules of Section 89(a); qualification requirements of Section 89(k); and cafeteria plans under Section 125. They also include numerous special transition rules, particularly for plan years beginning in 1989.

The IRS said that although these are proposed regulations, taxpayers can rely on them. The regulations also provide that during a transitional period of at least a year, employers will be treated as having satisfied Section 89 if they can show they made reasonable and good faith efforts to comply with section 89.

The proposed regulations will appear in the Federal Register on Mar. 7, 1989. Written comments and requests for a public hearing should be sent to Commissioner of Internal Revenue, Attn: CC:CORP:T:R (EE-130-86), Washington, DC 20224, by May 8, 1989.

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