In what many tax lawyers, accountants, and consultants call a "bombshell" news release, the Internal Revenue Service has labeled "invalid" certain flexible-benefits plans that allow workers to pay medical or other expenses not covered by group-benefits plans with pretax dollars. The action would seem to call into question the use of "reimbursement" or "flexible-spending" accounts, which INC. described in last month's issue (see March, page 61). Most flexible-benefits plans of this type allow employees to increase the size of the employer-funded account through a salary-reduction plan that works to reduce a worker's taxable income as it increases his or her benefits. buying power. Observers believe the agency is seeking to stop the common practice of allowing any unspent monies derived from salary reduction to revert to the employee at the end of the year. At last word, proposed rules governing these and other flexible-benefits plans were expected -- as they have been since 1978 -- in the near future."
Published on: Apr 1, 1984