8897 / What is a cafeteria plan? What information must an employer provide in order to establish a cafeteria plan for its employees?

Some cafeteria plans provide for salary reduction contributions by the employee and others provide benefits in addition to salary. In either case, the employee-participants are given the opportunity to purchase certain benefits with pre-tax dollars.

A plan may provide for automatic enrollment whereby an employee’s salary is reduced to pay for “qualified benefits” unless the employee affirmatively elects cash.²

Under the 2007 proposed regulations (effective for plan years beginning on or after
January 1, 2009), the written plan document must contain:

(1)  a specific description of the benefits, including periods of coverage;

(2)  the rules regarding eligibility for participation;

(3)  the procedures governing elections;

(4)  the manner in which employer contributions are to be made, such as by salary reduction or non-elective employer contributions;

(5)  the plan year;

(6)  the maximum amount of employer contributions available to any employee stated as (a) a maximum dollar amount or maximum percentage of compensation or (b) the method for determining the maximum amount or percentage;

(7)  a description of whether the plan offers paid time off, and the required ordering rules for use of non-elective and elective paid time off;

(8)  the plan’s provisions related to any flexible spending arrangements (FSA) included in the plan;

(9)  the plan’s provisions related to any grace period offered under the plan; and

(10)  the rules governing distributions from a health FSA to employee health savings accounts (HSAs), if the plan permits such distributions (see Q 8834).³

The plan document need not be self-contained, but may incorporate by reference separate written plans.⁴

Participants should note that, under the ACA, for purchases made after 2010 and before 2020, the cost of an over-the-counter medicine or drug could not be reimbursed from FSAs ( Q 8902), HRAs ( Q 8805) or HSAs ( Q 8825) unless a prescription was obtained.⁵ This rule did not affect insulin, even if purchased without a prescription, or other health care expenses such as medical devices, eyeglasses, contact lenses, co-pays and deductibles. FSA and HRA participants may use debit cards to buy prescribed over-the-counter medicines, if certain requirements are met (see Q 8805).⁶ The prescription requirement was removed for over-the-counter drugs beginning in 2020 in response to the COVID-19 pandemic.⁷

After 2013, a $2,500 limit (as indexed for inflation) applies to the amount that can be contributed to an FSA (see Q 8902) and, in 2014, a new optional $500 carryover provision can be incorporated into a health FSA.⁸

Former employees may participate in an employer’s cafeteria plan (although the plan may not be established predominantly for their benefit), but self-employed individuals may not.⁹ A full-time life insurance salesperson who is treated as an employee for Social Security purposes will also be considered an employee for cafeteria plan purposes (see Q 8732).¹⁰

See Q 8898 for an explanation of benefits that may be offered through cafeteria plans. See Q 8899 for a discussion of the nondiscrimination requirements that apply to cafeteria plans. See Q 8900 for a discussion of “simple” cafeteria plans.