Many employers sponsor cafeteria plans under section 125 of the Internal Revenue Code to allow their employees to pay for benefits with pre-tax dollars. Since all benefits employers provide to their employees are taxable, a properly-structured cafeteria plan allows employees to receive benefits that are not subject to federal income tax.
A cafeteria plan allows employees the ability to choose from a selection of benefits consisting of either cash (regular pay) or reducing that pay to receive a nontaxable benefits (such as medical coverage). A cafeteria plan is not a direct benefit provided to employees. Instead, it is an IRS-created tax vehicle for employees to elect benefits and to pay for their elections. Through the cafeteria plan, an employee elects to reduce their salary to pay for benefits.
The IRS imposes certain requirements on cafeteria plans.
- All participants in the cafeteria plan must be employees
- Participants must choose among two or more benefits consisting of cash and qualified benefits.
Qualified benefits that may be offered through a cafeteria plan include
- Accident or health plan coverage
- Vision coverage
- Dental coverage
- Prescription drug coverage
- AD&D coverage
- Adoption assistance benefits
- Dependent care assistance benefits
- Disability coverage
- Health savings account contributions
- Life insurance
- Paid time off purchase/sale
Some cafeteria plans include a cash-out option. Some of these plans include dollar caps to limit the amount a participant can receive.
Cafeteria plans must be in writing to be qualified under the Internal Revenue Code. The written document must be adopted by the employer. It may not discriminate in favor of highly compensated employees as to eligibility to participate, contributions or benefits. Employers must follow the terms of their written plan documents.
Employers who allow employees to pay for benefits with pre-tax dollars should review their documentation to make sure they have properly captured the terms of their cafeteria plan in a written document. BAS can assist with plan documentation requirements. For more information, contact your account manager or info@BASusa.com.
