The Internal Revenue Service is studying cafeteria plans that let workers set aside pre-tax money for medical bills, dependent care or contributions to 401(k) plans, and might take action against companies that fail to comply with tax rules.
The study of the plans is part of an effort by the agency to beef up compliance with regulations under Section 125 of the Internal Revenue Code.
Cafeteria plans are attractive to employees because they can shelter the mone y set aside from income taxes. The only problem is the "use it or lose it" feature - money that employees don't use up by the end of the year reverts to the employer.
"We may have significant non-compliance in this area," said A bba Rabbani, cafeteria plan industry specialist in the IRS' Dallas office, who is heading up the study. The IRS has had "little or no oversight of cafeteria plans," he said.
The IRS noticed in particular that many companies might not be filing Form 5500s or might not have written documents detailing how the plans work. There is also "tremendous confusion" about how employers must calculate the cost of the plans, he said.
The IRS hopes to find the number o f companies that have such plans, the areas in which companies are violating the rules, and ways to help them comply. The IRS also hopes to prod the Treasury Department to finalize rules giving guidance to employers on how the plan s work. The regulations were proposed - but never finalized - more than 12 years ago.
The IRS also wants to show some presence through enforcement action. But also being considered is a closing agreement program that would let compa nies fix the problems, rather than risk losing their tax-favored status.
If the plan is discriminatory, highly paid workers have to pay taxes on the money they set aside through the plans. If a plan has other problems, such as the l ack of a written plan document, the plan could lose its tax-favored status. But Mr. Rabbani said the IRS' goal is not to scare companies from offering such plans.
"Our purpose is not to disqualify plans, and to tax pre-tax dollars. "The IRS hopes to complete its study before 1999, he said.