Q.- Our company has a Board of Directors. We pay the Directors fees for their service. One of the Directors asked if he can participate in our Code section 125 cafeteria plan. Can we let him participate?
A.- No, unless the Director is also an employee. A cafeteria plan is defined under section 125 of the Internal Revenue Code to mean a written plan under which all participants are employees. An outside Director cannot participate in the company's cafeteria plan because he is not an employee. The fee the company pays to the Director for service on the Board will generally be considered self-employment income. That fee cannot be reduced to pay for benefits under the company's cafeteria plan.