3502 / What benefits may be offered under a cafeteria plan?

A qualified benefit is a benefit that is not includable in the gross income of the employee because of an express statutory exclusion ahnd that does not defer receipt of compensation. Contributions to Archer Medical Savings Accounts ( Q 422), qualified scholarships, educational assistance programs, or excludable fringe benefits are not qualified benefits. No product that is advertised, marketed, or offered as long-term care insurance is a qualified benefit.³

With respect to insurance benefits, such as those provided under accident and health plans and group term life insurance plans, the benefit is the coverage under the plan. Accident and health benefits are qualified benefits to the extent that coverage is excludable under IRC Section 106.⁴ Accidental death coverage offered in a cafeteria plan under an individual accident insurance policy is excludable from the employee’s income under IRC Section 106.⁵ A cafeteria plan can offer group term life insurance coverage on employees participating in the plan. Coverage that is includable in income only because it exceeds the $50,000 excludable limit under IRC Section 79 also may be offered in a cafeteria plan.⁶ The application of IRC Section 79 to group term life insurance and IRC Section 106 to accident or health benefits is explained in Q 240 to Q 249 and Q 8789.

Accident and health coverage, group term life insurance coverage, and benefits under a dependent care assistance program remain “qualified” even if they must be included in income because a nondiscrimination requirement has been violated.⁷ (See Q 3625.) Health coverage and dependent care assistance under flexible spending arrangements (FSAs) are qualified benefits if they meet the requirements explained in Q 3515.

For taxable years beginning after December 31, 2012, a health FSA offered through a cafeteria plan will not be treated as a qualified benefit unless the plan provides that an employee may not elect for any taxable year to have salary reduction contributions in excess of $3,300 in 2025 ($3,200 in 2024, $3,050 in 2023, $2,850 in 2022 and $2,750 in 2020 and 2021) made to such arrangement.⁸

A cafeteria plan generally cannot provide for deferred compensation, permit participants to carry over unused benefits or contributions from one plan year to another, or permit participants to purchase a benefit that will be provided in a subsequent plan year. A cafeteria plan, however, may permit a participant in a profit sharing, stock bonus, or rural cooperative plan that has a qualified cash or deferred arrangement to elect to have the employer contribute on the employee’s behalf to the plan.⁹ After-tax employee contributions to a qualified plan subject to IRC Section 401(m) are permissible under a cafeteria plan, even if matching contributions are made by the employer.¹⁰

FSAs may allow a grace period of no more than 2½ months following the end of the plan year for participants to incur and submit expenses for reimbursement.¹¹ FSAs may now be amended so that $500 of unused amounts ($660 in 2025, $640 in 2024, $610 in 2023, $570 in 2022 and $550 in 2021) remaining at the end of the plan year may be carried forward to the next plan year. However, plans that incorporate the carry forward provision may not also offer the 2½ month grace period.¹²

A cafeteria plan also may permit a participant to elect to have the employer contribute to a health savings account (HSA) on the participant’s behalf ( Q 390).¹³ Unused balances in HSAs funded through a cafeteria plan may be carried over from one plan year to another.

Under the general rule, life, health, disability, or long-term care insurance with an investment feature, such as whole life insurance, or an arrangement that reimburses premium payments for other accident or health coverage extending beyond the end of the plan year cannot be purchased.¹⁴ Supplemental health insurance policies that provide coverage for cancer and other specific diseases do not result in the deferral of compensation and are properly considered accident and health benefits under IRC Section 106.15

A cafeteria plan maintained by an educational organization described in IRC Section 170(b)(1)(A)(ii) (i.e., one with a regular curriculum and an on-site faculty and student body) can allow participants to elect postretirement term life insurance coverage. The postretirement life insurance coverage must be fully paid up on retirement and must not have a cash surrender value at any time. Postretirement life insurance coverage meeting these conditions will be treated as group term life insurance under IRC Section 79.16

To provide tax favored benefits to highly compensated employees and “key employees,” a cafeteria plan must meet certain nondiscrimination requirements and avoid concentration of benefits in key employees ( Q 3504).

The Affordable Care Act requires plans and issuers that offer dependent coverage to make the coverage available until a child reaches the age of 26.17 To implement the expanded coverage, the ACA allows employers with cafeteria plans to permit employees to immediately make pre-tax salary reduction contributions to provide coverage for children under age 27, even if the cafeteria plan has not yet been amended to cover these individuals.

Both married and unmarried children qualify for this coverage. This rule applies to all plans in the individual market and to new employer plans. It also applies to existing employer plans unless the adult child has another offer of employer-based coverage. Beginning in 2014, children up to age 26 can stay on their parent’s employer plan even if they have another offer of coverage through an employer.

Employees are eligible for this tax benefit from March 30, 2010 forward if the children are already covered under the employer’s plan or are added to the employer’s plan at any time. For this purpose, a child includes a son, daughter, stepchild, adopted child, or eligible foster child. This “up to age 26” standard replaces the lower age limits that applied under prior tax law, as well as the requirement that a child generally qualify as a dependent for tax purposes.