Cafeteria Plans

Editor's Note: Employers need to know requirements associated with offering cafeteria plans.

Tracy MorleyOverview: Cafeteria plans allow employees to choose among a variety of taxable and nontaxable benefits. Under these plans, employees may choose to receive either cash (or another taxable benefit) or one or more nontaxable benefits offered by an employer.

Employers with one or more employees subject to taxation are eligible to sponsor a cafeteria plan. To receive tax-favored treatment, the plan must meet the requirements of Internal Revenue Code Section 125, some of which include: (i) maintain a written plan document; (ii) meet ERISA's reporting and disclosure rules; (iii) not permit deferral of income; (iv) not discriminate in favor of highly compensated employees; and (v) not permit revocation of elections (except under limited circumstances).

Cafeteria plans may only be used to provide qualified benefits, such as:

  • Accident and health benefits;
  • Contributions to health savings accounts (HSAs);
  • Adoption assistance;
  • Dependent care assistance; and
  • Group-term life insurance.

Trends: Many employers design their employee benefit programs to meet the needs of a diverse workforce and may use cafeteria plans for more flexibility. In a continuous effort to respond to fluid economic and demographic challenges, the use of cafeteria and other flexible benefit plans will likely increase.

Tracy Morley, SPHR, Legal Editor

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HR guidance on understanding the requirements of cafeteria plans.