Cafeteria Plans

<div class="Section1">Under both the proposed and final regulations, employers are not required to continue an employees’ non-health benefits provided under a cafeteria plan (e.g., life insurance) during an FMLA leave. Rather, whether an employee is entitled to the continuation of non-health benefits must be decided under the employer’s policy applicable to employees on non-FMLA leave.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     Treas. Reg. § 1.125-3, A-7.<br /> <br /> </div>

<div class="Section1">Amounts received by participants, or their beneficiaries, under a cafeteria plan are not treated as wages. Thus, these amounts are not subject to tax under the Federal Insurance Contributions Act (FICA) or under the Federal Unemployment Tax Act (FUTA) if such payments would not be treated as wages without regard to the plan, and if it is reasonable to believe that IRC Section 125 would not treat any wages as constructively received.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC §§ 3121(a)(5)(G), 3306(b)(5)(G).<br /> <br /> </div>

<div class="Section1">A flexible spending arrangement (FSA) is a program under IRC Section&nbsp;125 under which incurred expenses may be reimbursed. This benefit may be provided as a stand-alone plan or as part of a traditional cafeteria plan. The most common types are health FSAs ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3516">3516</a>) and dependent care assistance FSAs ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3517">3517</a>).<div class="Section1"><br /> <br /> In order for the coverage provided through an FSA to qualify for the exclusion from income under IRC Sections 105 and 106 or IRC Section&nbsp;129 (for dependent care FSAs, <em>see</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3625">3625</a>), the FSA must meet the requirements set forth in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3516">3516</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3517">3517</a>.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> To qualify, a 401(k) plan (or a plan that provides a 401(k) cash or deferred arrangement) generally must first be a qualified profit sharing or stock bonus plan.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> Contributions to the plan made under a cash or deferred arrangement must satisfy the nondiscrimination in amount requirement ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3802">3802</a>), be subject to withdrawal restrictions<br /> ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3802">3802</a>), and will not be included in the employee&rsquo;s gross income unless the employee elects to treat the contributions as designated Roth contributions ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3779">3779</a>).<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect; 401(k); Treas. Reg. &sect; 1.401(k)-1(a)(1).<br /> <br /> </div></div><br />

<div class="Section1">Any gain or income from an FSA may be (1) used to reduce premiums for the following year; or (2) returned to the premium payors as dividends or premium refunds on a reasonable basis, but in no case based on their individual claims experience.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="Section1"><br /> <br /> The maximum amount of reimbursement for a period of coverage under an FSA may not be substantially in excess of the total “premium” for the coverage. The maximum amount of reimbursement is not considered to be substantially in excess of the total premium if the maximum amount is less than 500 percent of the premium. This definition is applicable to plan years beginning after December 31, 1989.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Since 2013, there are two possible plan options for a participant with <em>unspent funds</em> in a health FSA. The plan may (1) allow for a carryover of up to $500 to the next year, but forfeit amounts in excess of $500 ($660 in 2025, $640 in 2024 and $610 in 2023) at year end; or (2) allow for a grace period giving participants up to an additional 2½ months (through March 15) to spend the unused funds, but forfeit any remaining at the end of the grace period. The employer can offer either option, but not both. Or it can offer neither option resulting in forfeiture of all unspent funds at end of year.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     Prop. Treas. Reg. § 1.125-5(o).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     Prop. Treas. Reg. § 1.125-5(a).<br /> <br /> </div>

<div class="Section1"><br /> <br /> Yes. Tax-exempt employers such as 501(c)(3) organizations are eligible to offer 401(k) arrangements.<a href="#_ftn1" name="_ftnref1">¹</a> State and local government employers (including political subdivisions and agencies thereof) generally are prohibited from offering 401(k) arrangements to their employees, but certain rural cooperatives may do so.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 401(k)(4)(B)(i). Of course, 403(b) plans are an option for nongovernmental tax-exempt employers and are also available to governmental tax-exempt employers, like school districts.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  IRC §§ 401(k)(1), 401(k)(2), 401(k)(4)(B)(ii).<br /> <br /> </div>

<div class="Section1"><br /> <br /> The plan must provide that the amount any employee can elect to defer for any calendar year under the cash or deferred arrangement of any plan is limited to $23,500 in 2025 ($23,000 in 2024, $22,500 in 2023, $20,500 in 2022, and $19,500 in 2020-2021) and is subject to indexing for inflation thereafter ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3760">3760</a>).<a href="#_ftn1" name="_ftnref1">¹</a> Plans also may allow additional elective deferrals, known as catch-up contributions, by participants age 50 or over. These catch-up contributions, if made under the provisions of IRC Section 414(v), are not subject to the Section 401(a)(30) limit ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3761">3761</a>).<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect;&sect; 401(a)(30), 402(g)(1); Notice 2019-59, Notice 2020-79, Notice 2021-61, Notice 2022-55, Notice 2023-75, Notice 2024-80.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect; 414(v)(3)(A).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Cash or deferred arrangements included in a plan generally are treated as a single cash or deferred arrangement for purposes of meeting the requirements discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3754">3754</a> through Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3758">3758</a>, and for purposes of the coverage requirements of IRC Section 410(b).<a href="#_ftn1" name="_ftnref1">¹</a> The deferral percentage taken into account under the ADP tests for any highly compensated employee who is a participant in two or more cash or deferred arrangements under plans of the participant&rsquo;s employer that are required to be aggregated (as discussed above) is the average of the deferral percentages for the employee under each of the arrangements.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Restructuring may not be used to demonstrate compliance with the requirements of IRC Section 401(k).<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; <em><em>See</em></em> Treas. Reg. &sect; 1.401(k)-1(b)(4)(ii).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect; 401(k)(3)(B).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Treas. Reg. &sect; 1.401(k)-1(b)(4)(iv)(B).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> An employee must be fully vested at all times in his or her elective contributions and cannot be subject to the forfeitures and suspensions that are permitted by the IRC for benefits derived from employer contributions ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3869">3869</a>). Furthermore, such amounts cannot be taken into consideration in applying the vesting rules to other contributions.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> Employer matching contributions and nonelective employer contributions that are taken into account for purposes of satisfying the special nondiscrimination rules applicable to cash or deferred arrangements ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3802">3802</a>) must be immediately nonforfeitable and subject to the withdrawal restrictions explained in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3797">3797</a>.<a href="#_ftn2" name="_ftnref2">²</a> All other contributions to a plan that includes a cash or deferred arrangement also are subject to these restrictions unless a separate accounting is maintained.<a href="#_ftn3" name="_ftnref3">³</a> Contributions made under a SIMPLE 401(k) plan are subject to special nonforfeitability requirements ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3778">3778</a>).<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp; IRC &sect; 401(k)(2)(C); Treas. Reg. &sect; 1.401(k)-1(c); <em>see also</em> Treas. Reg. &sect; 1.401(k)-1(c).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; <em><em>See</em></em> Treas. Reg. &sect;&sect; 1.401(k)-1(c), 1.401(k)-1(d).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Treas. Reg. &sect; 1.401(k)-1(e)(3).<br /> <br /> </div></div><br />

<div class="Section1">Participants in a cafeteria plan may choose among two or more benefits consisting of cash and qualified benefits<strong>.<a href="#_ftn1" name="_ftnref1">¹</a></strong> A cash benefit includes not only cash, but a benefit that may be purchased with after-tax dollars or the value of which is generally treated as taxable compensation to the employee (provided the benefit does not defer receipt of compensation).<a href="#_ftn2" name="_ftnref2">²</a><div class="Section1"><br /> <br /> 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 <a href="javascript:void(0)" class="accordion-cross-reference" id="422">422</a>), 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.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> 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&nbsp;106.<a href="#_ftn4" name="_ftnref4">⁴</a> Accidental death coverage offered in a cafeteria plan under an individual accident insurance policy is excludable from the employee&rsquo;s income under IRC Section&nbsp;106.<a href="#_ftn5" name="_ftnref5">⁵</a> 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&nbsp;79 also may be offered in a cafeteria plan.<a href="#_ftn6" name="_ftnref6">⁶</a> The application of IRC Section&nbsp;79 to group term life insurance and IRC Section&nbsp;106 to accident or health benefits is explained in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="240">240</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="249">249</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8789">8789</a>.<br /> <br /> Accident and health coverage, group term life insurance coverage, and benefits under a dependent care assistance program remain &ldquo;qualified&rdquo; even if they must be included in income because a nondiscrimination requirement has been violated.<a href="#_ftn7" name="_ftnref7">⁷</a> (<em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3625">3625</a>.) Health coverage and dependent care assistance under flexible spending arrangements (FSAs) are qualified benefits if they meet the requirements explained in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3515">3515</a>.<br /> <br /> 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.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> 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&rsquo;s behalf to the plan.<a href="#_ftn9" name="_ftnref9">⁹</a> After-tax employee contributions to a qualified plan subject to IRC Section&nbsp;401(m) are permissible under a cafeteria plan, even if matching contributions are made by the employer.<a href="#_ftn10" name="_ftnref10">¹⁰</a><br /> <br /> FSAs may allow a grace period of no more than 2&frac12; months following the end of the plan year for participants to incur and submit expenses for reimbursement.<a href="#_ftn11" name="_ftnref11">¹¹</a> 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 2&frac12; month grace period.<a href="#_ftn12" name="_ftnref12">¹²</a><br /> <br /> A cafeteria plan also may permit a participant to elect to have the employer contribute to a health savings account (HSA) on the participant&rsquo;s behalf ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="390">390</a>).<a href="#_ftn13" name="_ftnref13">¹³</a> Unused balances in HSAs funded through a cafeteria plan may be carried over from one plan year to another.<br /> <br /> 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.<a href="#_ftn14" name="_ftnref14">¹⁴</a> 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.<a href="#_ftn15" name="_ftnref15">15</a><br /> <br /> 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.<a href="#_ftn16" name="_ftnref16">16</a><br /> <br /> To provide tax favored benefits to highly compensated employees and &ldquo;key employees,&rdquo; a cafeteria plan must meet certain nondiscrimination requirements and avoid concentration of benefits in key employees ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3504">3504</a>).<br /> <br /> 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.<a href="#_ftn17" name="_ftnref17">17</a> 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.<br /> <br /> 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&rsquo;s employer plan even if they have another offer of coverage through an employer.<br /> <br /> Employees are eligible for this tax benefit from March&nbsp;30, 2010 forward if the children are already covered under the employer&rsquo;s plan or are added to the employer&rsquo;s plan at any time. For this purpose, a child includes a son, daughter, stepchild, adopted child, or eligible foster child. This &ldquo;up to age 26&rdquo; 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.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect;&nbsp;125(d)(1)(B).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Prop. Treas. Reg. &sect;&nbsp;1.125-1(a)(2).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect;&nbsp;125(f); Prop. Treas. Reg. &sect;&nbsp;1.125-1(q).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Prop. Treas. Reg. &sect;&nbsp;1.125-1(h)(2).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Let. Ruls. 8801015, 8922048.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Prop. Treas. Reg. &sect;&nbsp;1.125-1(k).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect;&nbsp;129(d); Prop. Treas. Reg. &sect;&nbsp;1.125-1(b)(2).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 125(i); Rev. Proc. 2019-44, Rev. Proc. 2020-45, Rev. Proc. 2021-45, Rev. Proc. 2022-38, Rev. Proc. 2023-34, Rev. Proc. 2024-40.<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect;&nbsp;125(d)(2).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp;&nbsp;&nbsp;&nbsp; Prop. Treas. Reg. &sect;&nbsp;1.125-1(o)(3)(ii).<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.&nbsp;&nbsp;&nbsp;&nbsp; Prop. Treas. Reg. &sect;&nbsp;1.125-1(e); Notice 2005-42, 2005-1 CB 1204.<br /> <br /> <a href="#_ftnref12" name="_ftn12">12</a>.&nbsp;&nbsp;&nbsp;&nbsp; Notice 2013-71, 2013-47 IRB 532.<br /> <br /> <a href="#_ftnref13" name="_ftn13">13</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect;&nbsp;125(d)(2)(D).<br /> <br /> <a href="#_ftnref14" name="_ftn14">14</a>.&nbsp;&nbsp;&nbsp;&nbsp; Prop. Treas. Reg. &sect;&nbsp;1.125-1(p)(1)(ii).<br /> <br /> <a href="#_ftnref15" name="_ftn15">15</a>.&nbsp;&nbsp;&nbsp;&nbsp; TAM 199936046.<br /> <br /> <a href="#_ftnref16" name="_ftn16">16</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 125(d)(2)(C).<br /> <br /> <a href="#_ftnref17" name="_ftn17">17</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 105(b); Notice 2010-38.<br /> <br /> </div></div><br />