Many cafeteria plans include health care or dependent care spending accounts that allow employees to use before-tax dollars to pay for health care or dependent care expenses. The catch is that if employees do not fully utilize the dollars they contributed to their cafeteria plan spending accounts by the end of the plan year, they forfeit those funds. To provide some relief to employees, the IRS recently announced that employers may amend their cafeteria plans to allow employees up to 2 ½ months after the end of the plan year to incur expenses that may be reimbursed from amounts contributed to the cafeteria plan for the prior year.

Employers may implement this grace period change for 2005 by so amending their cafeteria plans before the end of the plan year. The grace period extension must apply to all cafeteria plan participants. Employers also may extend the claims filing period beyond the 2 ½ month grace period to allow employees time to submit claims.

The addition of the grace period is not mandatory, so employers need to consider whether they wish to implement this change. This change may reduce the amount of forfeitures generated by the cafeteria plan, which may be a disadvantage to employers who utilize forfeitures to offset losses resulting from the "uniform coverage" rule (the rule that requires the total annual contribution amount to be available to reimburse medical claims starting with the first day of the plan year). Additionally, because the cafeteria plan grace period does not fit well within the current regulatory structure, the new grace period raises some COBRA and HIPAA questions that have not been addressed. Finally, employers should consult with their cafeteria plan administrators to determine which approach fits best within the administrator’s recordkeeping system.

For more information about this topic or for assistance with any other employee benefit or executive compensation matters, please contact our employment benefits counsel Nancy Brower at 704.342.5275 or ncbrower@poynerspruill.com,  Gene Griggs at 704.342.5320 or ggriggs@poynerspruill.com, or Hugh Davis at 919.783.2908 or hwdavis@poynerspruill.com.