Introduction to Cafeteria Plans
"Cafeteria Plan" is the term used in Internal Revenue Code Section 125 for a pre-tax benefits program. Cafeteria plans are often referred to by other names, including: Flexible spending accounts (FSA), Section 125 plans, and Health Care Reimbursement Accounts. For more information on FSAs and Health Care Reimbursement Accounts, please click here.
Section 125 of the Internal Revenue Code makes it possible for employers to offer their employees a choice between cash and a variety of nontaxable benefits without the application of the constructive receipt rules with respect to income recognition by the employees.
A cafeteria plan, including a flexible spending arrangement, is a written plan that allows employees to choose between receiving cash or taxable benefits instead of certain qualified benefits for which the law provides an exclusion from wages. If an employee chooses to receive a qualified benefit under the plan, the fact that the employee could have received cash or a taxable benefit instead will not make the qualified benefit taxable.
Generally, a cafeteria plan does not include any plan that offers a benefit that defers pay. However, a cafeteria plan can include a qualified 401(k) plan as a benefit. Also, certain life insurance plans maintained by educational institutions can be offered as a benefit even though they defer pay.
See also, new and proposed Cafeteria Plan rules, effective January 1, 2009.
Cafeteria Plans: Qualified Benefits
Qualified benefits include the following benefits:
- Accident and health benefits (but not Archer medical savings accounts (Archer MSAs) or long-term care insurance).
- Adoption assistance.
- Dependent care assistance.
- Group-term life insurance coverage (including costs that cannot be excluded from wages).
- Health savings accounts (HSAs). Distributions from an HSA may be used to pay eligible long-term care insurance premiums or qualified long-term care services.
Cafeteria Plans: Benefits Not Allowed...