IRS Decides To Allow Tax-Free Roll Over of Funds in Defined Contribution Plans

As expected, the IRS on June 26 decided that money left in defined contribution health plans at the end of the year can be rolled over to the next year, tax free, the AP/New York Times reports (AP/New York Times, 6/26). Although the few companies offering their employees defined contribution plans commonly allow employees to roll over the funds tax free, the practice has been a "gray area" under current IRS rules, and many companies have been reluctant to offer such plans because of the ambiguity (Kaiser Daily Health Policy Report, 6/26). Treasury Secretary Paul O'Neill said the IRS ruling could give employers "more choice and greater control" over their health coverage. The AP/Times reports that the decision could "clear the way for more companies to offer" defined contribution plans. The ruling also specifies how such plans can qualify for tax-exempt status. For a defined contribution plan to avoid taxes, it must be funded entirely by the employer and can be used only for substantiated medical expenses. Under the IRS ruling, former employees, including retirees, are permitted access to their unused funds (AP/New York Times, 6/26).