March 02, 1989
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
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
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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