Cafeteria-style benefit plans under IRC Section 125 do not excuse compliance with Suastez

STATE OF CALIFORNIA GEORGE DEUKMEJIAN, Governor

DEPARTMENT OF INDUSTRIAL RELATIONS

DIVISION OF LABOR STANDARDS ENFORCEMENT 1986.12.24
525 GOLDEN GATE AVENUE
SAN FRANCISCO, CALIFORNIA 94102

                                                              ADDRESS REPLY TO:
        (415)     557-3827
                                                                P.O. BOX 603
                                                                San Francisco, CA 94101

                                                              IN REPLY REFER TO:

December 24, 1986

Mr. Allen J. Perlof, General Counsel
Security Pacific National Bank
Head Office
P.O. Box 2097
Terminal Annex
Los Angeles, CA 90051

Dear Mr. Perlof:

This letter is intended to respond to your letter of November 12, 1986, seeking clarification of the relationship between the Division's Interpretive Bulletin No. 86-3, applying the Suastez decision, and regulations issued under Internal Revenue Code Section 125 involving cafeteria-style benefit plans.

After receiving your letter, I asked my legal staff to do some legal research on this issue. We can find nothing in Internal Revenue Code Section 125 or any other provision of the Internal Revenue Code which would preempt California's Labor Code Section 227.3 and the Suastez decision. Moreover, under the California Constitution, Article III, Section 3.5(c), an administrative agency is not permitted to refuse to enforce a California statute on the basis that federal law or federal regulations prohibit the enforcement of such statute unless an Appellate Court has made a determination that the enforcement of such statute is prohibited by federal law or federal regulations. Accordingly, a vacation plan which complies with the Internal Revenue Service regulation would not be a permissible exception to Suastez and the Interpretive Bulletin.

In order to comply with both the Revenue Code ruling and Suastez, the bank must insure that employees take all of their vacation before the end of the year or are paid off at the end of the year so that nothing is lost. Another option would be to remove vacation as one of the benefits offered in the plan and pay it separately. Finally, the bank could also structure its cafeteria-style benefit plan as a funded rather than an unfunded plan. As a funded plan, it would fall under ERISA and, therefore, be exempt from 227.3 and the Suastez ruling.

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I apologize for the delay in responding to your letter and hope the foregoing will be useful to you as you redesign your plan.

If you have any further questions, please do not hesitate to contact me

Very truly yours,

Lloyd W. Aubry, Jr.
State Labor Commissioner

LWA/cas