Fringe Benefits

<div class="Section1">Only payments that are classified as qualified student loan payments (QSLPs) can be considered in the employer’s matching program. A qualified student loan payment is one that is made on a loan taken for the sole purpose of paying qualified education expenses for the individual, a spouse or someone who was the individual’s dependent at the time the debt was incurred. The loan must be for education provided during an academic period for an eligible student and the expense must be paid or incurred within a reasonable period of time before or after the debt was incurred.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="Section1"><br /> <br /> Qualified education expenses include tuition, fees, books, and other similar required expenses incurred by an eligible student. An eligible student, in turn, is someone who is enrolled at least half-time (with at least six credit hours) in some type of program of study that is designed to lead to a degree, certificate or other type of recognized education credential at an eligible education institution.<br /> <br /> Expenses incurred for games, sports, hobbies, or non-credit activities do not qualify.<br /> <br /> The law does not specify whether the student must have graduated from or completed the program in order for the related student loan debt to qualify. Because the student loan matching program is entirely optional, it seems possible that the employer may be entitled to decide whether graduation is a requirement for receiving the benefit.<br /> <br /> The IRS has provided interim guidance on QSLPs via Notice 2024-63, which is effective in 2025 (employers can rely on a reasonable, good faith interpretation during 2024).  Future regulations and guidance are expected.<br /> <br /> In Notice 2024-63, the IRS clarified that the QSLP must be for the employee, the employee's spouse or dependents.  The employee must have a legal obligation to repay the loan, meaning that it must be either their loan or a loan they co-signed.  Absent the employee's legal obligation to repay, there is no QSLP.  If the employee did co-sign the loan, they must actually be making the payments for those payments to qualify as QSLPs.  When a dependent is making the payments, they are not QSLPs.<br /> <br /> The maximum amount that can be treated as a QSLP for the year is the annual 401(k) contribution limit for the year (or, if less, the employee’s compensation for the year), reduced by the employee’s elective deferrals for the year.<br /> <br /> All employees who are eligible to receive the match must be eligible for QSLPs.  The employer cannot restrict the match to a certain group of employees (an exception exists for collectively bargained employees), a certain type of loan or a certain type of educational institution or degree type.<br /> <br /> The employer can require that the employee be employed at the last day of the year to receive the match, but only if the employee has a similar requirement for traditional matching contributions. The employer is entitled to make QSLP matches at a different frequency from elective deferral-based matching contributions.<br /> <br /> The employer can establish one single QSLP match claiming deadline for the year, or can elect to establish multiple deadlines, so long as those deadlines are “reasonable”.  As an example, the IRS stated that an annual deadline that is three months from the end of the plan year would be reasonable, but earlier deadlines could also be found reasonable.<br /> <br /> Loan repayments made in prior plan years cannot be matched in the current plan year.<br /> <p style="text-align: center;"><strong>Employee Certification</strong></p><br /> Employers must require that employees provide specific certification with respect to their QSLPs.  The employer can require a separate certification for each qualified education loan payment intended to qualify as a QSLP or permit annual certification that applies to all payments intended to qualify.<br /> <br /> Certification must include the following information: (1) the amount of the loan payment; (2) the date of the loan payment; (3) that the payment was made by the employee; (4) that the loan being repaid is a qualified education loan and was used to pay for qualified higher education expenses of the employee, the employee’s spouse, or the employee’s dependent; and (5) that the loan was incurred by the employee.<a href="#_ftn2" name="_ftnref2">²</a>  The employer can require affirmative certification of each element by the employee.  The employer can also independently verify the first three elements.<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(m)(13).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a> Notice 2024-63.<br /> <br /> </div>

<div class="Section1">Yes. The employer’s expenses incurred in providing benefits under a dependent care assistance program generally are deductible to the employer as ordinary and necessary business expenses under IRC Section 162.</div>

<div class="Section1">Until 2002, an employer who maintained an Educational Assistance Program under IRC Section 127 was required to file an information return (Schedule F to the Form 5500) for each year that the program is in effect. The information return had to include the number of employees currently working, the number of employees eligible to participate in the plan, the number of employees actually participating, the total plan cost, and the number of highly compensated employees. In addition, the employer was required to identify itself and state the type of business in which it is engaged.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="Section1"><br /> <br /> Notice 2002-24, however, suspended these reporting requirements with respect to EAPs and certain other employee fringe benefits. Employers are relieved of the obligation to file under Section 6039D until the IRS provides further notice.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Notice 2002-24 superseded Notice 90-24, which exempted plans under Section 127 from furnishing the additional information concerning highly compensated employees that was required by the TRA ’86 amendments to Section 6039D.<br /> <br /> This reporting relief applies to any plan year that begins prior to the issuance of further guidance on this subject by the IRS.<a href="#_ftn3" name="_ftnref3">³</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 § 6039D.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  2002-16 IRB 785.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  Notice 90-24, 1990-1 CB 355.<br /> <br /> </div>

<div class="Section1">A dependent care assistance program is a separate written plan of an employer for the exclusive benefit of providing employees with payment for or the provision of services that, if paid for by the employee, would be considered employment-related expenses under IRC Section&nbsp;21(b)(2).<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> &ldquo;Employment-related expenses&rdquo; are amounts incurred to permit the taxpayer to be gainfully employed while he or she has one or more dependents under age 13 (for whom he or she would be entitled to a personal exemption deduction under IRC Section&nbsp;151(c) absent the suspension of the personal exemption for 2018-2025) or a dependent or spouse who cannot care for themselves.&nbsp;The expenses may be for household services or for the care of the dependents.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> The plan is not required to be funded.<a href="#_ftn3" name="_ftnref3">³</a> A dependent care program may also be provided through a cafeteria plan.<a href="#_ftn4" name="_ftnref4">⁴</a> <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8892">8892</a> for a discussion of the tax treatment of employer contributions to a dependent care assistance program. <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8894">8894</a> on the limitations to the amounts that an employee may exclude from income.<br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> With so many employees working from home, many employees are rethinking contributions to dependent care FSAs.&nbsp;The rules governing changes to dependent care FSA contributions are more flexible than health FSAs. Employees are permitted to make mid-year changes in pre-tax contributions if their circumstances relating to the need for dependent care changes. Employees can reduce their contributions if they are working from home and do not need childcare, or can increase the contributions when they return to work and need to provide for increased childcare costs.<br /> <br /> Further, employees who have been furloughed and laid off might want to ask whether their plan contains a spend-down feature.&nbsp;These features are optional, but allow former employees to seek reimbursement for dependent care expenses incurred through the end of the tax year (even if their employment has been terminated). Employers have the option of adding a spend-down feature at any time.<br /> <br /> <hr><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; IRC &sect;&sect;&nbsp;129(d)(1), 129(e)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&nbsp;21(b)(2).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect;&nbsp;129(d)(5).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; See Notice 2005-42, 2005-23 IRB 1204.<br /> <br /> </div></div><br />

<div class="Section1">The employee must identify on the tax return all persons or organizations that provide care for the employee’s dependent. This includes the name, address, and taxpayer identification number of the person (name and address in the case of a tax-exempt 501(c)(3) organization) providing the services. If the employee does not have the information, then the employee can use form W-10, Dependent Care Provider’s Identification and Certification to request this information from the provider. The IRS may disallow a credit to an employee who fails to provide this information unless the taxpayer can show that he or she exercised due diligence in attempting to obtain the information. To show due diligence, the taxpayer should attach a statement explaining that the provider refused to complete the W-10.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="Section1"><br /> <br /> As is the case with employer-provided educational assistance programs, the IRS has suspended the reporting requirements that are otherwise applicable to dependent care programs until further notice.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Prior to this suspension, IRC Section 6039D generally required an employer maintaining a dependent care assistance plan to file an information return with the IRS that provided:<br /> <blockquote>(1)  its number of employees;<br /> <br /> (2)  the number of employees eligible to participate in the plan;<br /> <br /> (3)  the number of employees participating in the plan;<br /> <br /> (4)  the number of highly compensated employees (“HCEs”) of the employer;<br /> <br /> (5)  the number of HCEs eligible to participate in the plan;<br /> <br /> (6)  the number of HCEs actually participating in the plan;<br /> <br /> (7)  the cost of the plan;<br /> <br /> (8)  the identity of the employer; and<br /> <br /> (9)  the type of business in which it is engaged.</blockquote><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 § 129(e)(9).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  Notice 2002-24, 2002-16 IRB 785; Notice 90-24, 1990-1 CB 335.<br /> <br /> </div>

<div class="Section1">Non-highly compensated employees are permitted to exclude limited amounts (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8894">8894</a>) received under an employer-sponsored dependent care assistance program for each tax year.<a href="#_ftn1" name="_ftnref1">¹</a> For highly compensated employees to enjoy the same income tax exclusion, the program must meet the following additional requirements:<br /> <blockquote>(1)&nbsp; Plan contributions or benefits must not discriminate in favor of highly compensated employees as defined in IRC Section&nbsp;414(q) or their dependents.<br /> <br /> (2)&nbsp; The program must benefit employees in a classification that does not discriminate in favor of highly compensated employees or their dependents.<br /> <br /> (3)&nbsp; No more than 25&nbsp;percent of the amounts paid by the employer for dependent care assistance may be provided for the class of shareholders and owners, each of whom owns more than five&nbsp;percent of the stock or of the capital or profits interest in the employer (certain attribution rules under IRC Section&nbsp;1563 apply).<br /> <br /> (4)&nbsp; Reasonable notification of the availability and terms of the program must be provided to eligible employees.<br /> <br /> (5)&nbsp; The plan must provide each employee, on or before January&nbsp;31, with a written statement of the expenses or amounts paid by the employer in providing such employee with dependent care assistance during the previous calendar year.<br /> <br /> (6)&nbsp; The average benefits provided to non-highly compensated employees under all plans of the employer must equal at least 55&nbsp;percent of the average benefits provided to the highly compensated employees under all plans of the employer.<a href="#_ftn2" name="_ftnref2">²</a></blockquote><br /> The dependent care assistance plan may disregard any employee with compensation that is less than $25,000 annually for purposes of the 55&nbsp;percent test if benefits are provided through a salary reduction agreement.<a href="#_ftn3" name="_ftnref3">³</a> For this purpose, compensation is defined in IRC Section&nbsp;414(q)(4), but regulations may permit an employer to elect to determine compensation on any other nondiscriminatory basis.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> For purposes of the eligibility and benefits requirements (described in items (2) and (6) above), the employer may exclude the following employees from consideration:<br /> <blockquote>(1)&nbsp; Employees who have not attained age 21 and completed one year of service (provided all such employees are excluded).<br /> <br /> (2)&nbsp; Employees covered by a collective bargaining agreement (provided there is evidence of good faith bargaining regarding dependent care assistance).<a href="#_ftn5" name="_ftnref5">⁵</a></blockquote><br /> A program will not fail to meet the requirements above, other than the 25&nbsp;percent test applicable to more than five&nbsp;percent shareholders, or the 55&nbsp;percent test applicable to benefits, merely because of the utilization rates for different types of assistance available under the program.&nbsp;The 55&nbsp;percent test may be applied on a separate line of business basis.<a href="#_ftn6" name="_ftnref6">⁶</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;&nbsp;129(d)(1).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&nbsp;129(d).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect;&nbsp;129(d)(8)(B).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; IRC &sect;&nbsp;129(d)(8)(B).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; IRC &sect;&nbsp;129(d)(9).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; IRC &sect;&nbsp;414(r).<br /> <br /> </div></div><br />

<div class="Section1"><em>Editor’s Note: </em>The American Rescue Plan Act (ARPA) allowed employers to increase contribution limits for dependent care assistance programs to $10,500 for 2021. The 2021 CAA also allowed participants to carry over unused DCAP benefits from 2020 or 2021 into the following plan year. Initially, there was some confusion over the tax consequences if a participant took advantage of both the increased contribution limit and carryover relief. Notice 2021-26 clarified the issue by providing that participants may take advantage of both (1) tax-free reimbursements of contributions made during the 2021 plan year up to the maximum $10,500 limit and (2) tax-free reimbursements of amounts carried over from the prior year. In other words, a participant with a $5,000 carryover amount from 2020 and a $10,500 contribution in 2021 could take tax-free distributions up to $15,500 in 2021 if that participant incurred enough qualifying expenses during the 2021 plan year. <em><em>See</em></em> below for a discussion of the otherwise applicable limitations.</div><br /> <div class="Section1"><br /> <br /> An employee may exclude up to $5,000 paid by the employer for dependent care assistance provided during a tax year.<a href="#_ftn1" name="_ftnref1">¹</a> The excludable amount is reduced to $2,500 for a married individual filing separately. Additionally, the excludable amount cannot exceed the earned income of an unmarried employee or the lesser of the earned income of a married employee or the earned income of the employee’s spouse.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> An employee cannot exclude from gross income any amount paid to an individual with respect to whom the employee or the employee’s spouse is entitled to take a personal exemption deduction under IRC Section 151(c) (prior to 2018, when the personal exemption was suspended for 2018-2025) or who is a child of the employee under 19 years of age at the close of the taxable year, or the spouse.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> If the dependent care assistance is provided by way of on-site facilities (such as an on-site day care center), the amount of dependent care assistance excluded is based on a dependent’s use of the facilities and the value of the services provided with respect to that dependent.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> The amount of employment-related expenses available in calculating the dependent care credit of IRC Section 21 is reduced by the amount excludable from gross income under IRC Section 129.<a href="#_ftn5" name="_ftnref5">⁵</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 § 129(a). <em><em>See</em></em> IRS Pub. 503.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 129(b).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.  IRC § 129(c).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.  IRC § 129(e)(8).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.  IRC § 21(c).<br /> <br /> </div>

<div class="Section1">A cafeteria plan (or &ldquo;flexible benefit plan&rdquo;) is a written plan that gives employees the option of choosing between cash and &ldquo;qualified benefits.&rdquo; With certain limited exceptions, a cafeteria plan cannot provide for deferred compensation, which generally means that the taxpayer-employee must use all benefits within the tax year.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> 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.<br /> <br /> A plan may provide for automatic enrollment whereby an employee&rsquo;s salary is reduced to pay for &ldquo;qualified benefits&rdquo; unless the employee affirmatively elects cash.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Under the 2007 proposed regulations (effective for plan years beginning on or after<br /> January&nbsp;1, 2009), the written plan document must contain:<br /> <blockquote>(1)&nbsp; a specific description of the benefits, including periods of coverage;<br /> <br /> (2)&nbsp; the rules regarding eligibility for participation;<br /> <br /> (3)&nbsp; the procedures governing elections;<br /> <br /> (4)&nbsp; the manner in which employer contributions are to be made, such as by salary reduction or non-elective employer contributions;<br /> <br /> (5)&nbsp; the plan year;<br /> <br /> (6)&nbsp; the maximum amount of employer contributions available to any employee stated as (a) a maximum dollar amount or maximum&nbsp;percentage of compensation or (b) the method for determining the maximum amount or&nbsp;percentage;<br /> <br /> (7)&nbsp; 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;<br /> <br /> (8)&nbsp; the plan&rsquo;s provisions related to any flexible spending arrangements (FSA) included in the plan;<br /> <br /> (9)&nbsp; the plan&rsquo;s provisions related to any grace period offered under the plan; and<br /> <br /> (10)&nbsp; the rules governing distributions from a health FSA to employee health savings accounts (HSAs), if the plan permits such distributions (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8834">8834</a>).<a href="#_ftn3" name="_ftnref3">³</a></blockquote><br /> The plan document need not be self-contained, but may incorporate by reference separate written plans.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> 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 <a href="javascript:void(0)" class="accordion-cross-reference" id="8902">8902</a>), HRAs ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8805">8805</a>) or HSAs ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8825">8825</a>) unless a prescription was obtained.<a href="#_ftn5" name="_ftnref5">⁵</a>&nbsp;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 (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8805">8805</a>).<a href="#_ftn6" name="_ftnref6">⁶</a>&nbsp;The prescription requirement was removed for over-the-counter drugs beginning in 2020 in response to the COVID-19 pandemic.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> After 2013, a $2,500 limit (as indexed for inflation) applies to the amount that can be contributed to an FSA (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8902">8902</a>) and, in 2014, a new optional $500 carryover provision can be incorporated into a health FSA.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> Former employees may participate in an employer&rsquo;s cafeteria plan (although the plan may not be established predominantly for their benefit), but self-employed individuals may not.<a href="#_ftn9" name="_ftnref9">⁹</a> 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 (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8732">8732</a>).<a href="#_ftn10" name="_ftnref10">¹⁰</a><br /> <br /> <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8898">8898</a> for an explanation of benefits that may be offered through cafeteria plans. <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8899">8899</a> for a discussion of the nondiscrimination requirements that apply to cafeteria plans. <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8900">8900</a> for a discussion of &ldquo;simple&rdquo; cafeteria plans.<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; IRC &sect;&nbsp;125(d).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; Rev. Rul. 2002-27, 2002-1 CB 925.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; Prop.&nbsp;Treas. Reg. &sect;&nbsp;1.125-1(c), 72 F.R. 43938 (Aug.&nbsp;6, 2007).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; Prop.&nbsp;Treas. Reg. &sect;&nbsp;1.125-1(c)(4).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; P.L. 111-148.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; IRS News Release IR-2010-128 (Dec.&nbsp;23, 2010).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; CARES Act &sect;&nbsp;3702.<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp; Notice 2012-40, 2012-26 IRB 1046.<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp; Prop.&nbsp;Treas. Reg. &sect;&nbsp;1.125-1(g)(2).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp; IRC &sect;&nbsp;7701(a)(20); Prop.&nbsp;Treas. Reg. &sect;&nbsp;1.125-1(g)(1)(iii).<br /> <br /> </div></div><br />

<div class="Section1">A &ldquo;simple cafeteria plan&rdquo; is a cafeteria plan that is established and maintained by an eligible employer and with respect to which contribution, eligibility, and participation requirements are met.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> For years beginning in 2011 and thereafter, the Patient Protection and Affordable Care Act (ACA) creates a safe harbor &ldquo;simple cafeteria plan&rdquo; under which an &ldquo;eligible employer&rdquo; (generally an employer with fewer than 100 employees) is treated as meeting any applicable nondiscrimination requirements ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8899">8899</a>) for the year.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> The employer is required to make contributions on behalf of each &ldquo;qualified employee&rdquo; in an amount equal:<br /> <p style="padding-left: 40px;">(1)&nbsp; a uniform&nbsp;percentage (not less than two&nbsp;percent) of the employee&rsquo;s compensation; or</p><br /> <p style="padding-left: 40px;">(2)&nbsp; an amount not less than the lesser of (x) six&nbsp;percent of the employee&rsquo;s compensation for the plan year, or (y) twice the amount of salary deduction contributions of each qualified employee.<a href="#_ftn3" name="_ftnref3">³</a></p><br /> Contribution requirement option (2) is not met if the rate of contributions with respect to the salary contributions of any highly compensated or key employee at any rate of contribution is greater than that with respect to an employee who is not a highly compensated or key employee.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> All employees with at least 1,000 hours of service during the preceding plan year must be eligible to participate. Further, each employee who is eligible to participate must be able to select any benefit available under the plan.<a href="#_ftn5" name="_ftnref5">⁵</a> An employee can be excluded if the employee:<br /> <p style="padding-left: 40px;">(1)&nbsp; is under age 21;</p><br /> <p style="padding-left: 40px;">(2)&nbsp; has less than one year of service;</p><br /> <p style="padding-left: 40px;">(3)&nbsp; is covered by a collective bargaining agreement and the benefits of the cafeteria plan were the subject of good faith bargaining; or</p><br /> <p style="padding-left: 40px;">(4)&nbsp; the employee is a nonresident alien working outside of the United States. <a href="#_ftn6" name="_ftnref6">⁶</a></p><br /> To implement a simple cafeteria plan, an employer must be an &ldquo;eligible employer,&rdquo; which is, with respect to any year, any employer that employed an average of 100 or fewer employees on business days during either of the two preceding years.<a href="#_ftn7" name="_ftnref7">⁷</a> An employer that initially qualifies for a simple cafeteria plan ceases to qualify in the year after the number of employees reaches 200.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> A qualified employee is any employee who is eligible to participate in the cafeteria plan and who is not a highly compensated or key employee.<a href="#_ftn9" name="_ftnref9">⁹</a><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; IRC &sect;&nbsp;125(j)(2); IRS Publication 15-B.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&nbsp;125(j)(1).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect;&nbsp;125(j)(3)(A).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; IRC &sect;&nbsp;125(j)(3)(B).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; IRC &sect;&nbsp;125(j)(4)(A).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; IRC &sect;&nbsp;125(j)(4)(B).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; IRC &sect;&nbsp;125(j)(5)(A).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp; IRC &sect;&nbsp;125(j)(5)(C).<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp; IRC &sect;&nbsp;125(j)(3)(D).<br /> <br /> </div></div><br />

<div class="Section1">If a cafeteria plan discriminates in favor of highly compensated individuals as to eligibility to participate or as to contributions or benefits, highly compensated participants will be considered in constructive receipt of the available cash benefit, which will prevent these employees from excluding the amounts from income.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> &ldquo;Highly compensated&rdquo; individuals are officers, shareholders owning more than five&nbsp;percent of the voting power or value of all classes of stock, those who are &ldquo;highly compensated,&rdquo; and any of their spouses or dependents. For this purpose, &ldquo;highly compensated&rdquo; means (1) any individual or participant who, for the preceding plan year (or the current plan year in the case of the first year of employment), had compensation from the employer in excess of the compensation amount specified in IRC Section&nbsp;414(q)(1)(B) ($155,000 in 2024 and $160,000 in 2025 projected), and, (2) if elected by the employer, also was in the top-paid group of employees (determined by reference to Section&nbsp;414(q)(3)) for such preceding plan year (or for the current plan year in the case of the first year of employment).<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Participation will be nondiscriminatory if the following requirements are satisfied:<br /> <blockquote>(1)&nbsp; The plan benefits a classification of employees found by the Secretary of&nbsp;Treasury not to discriminate in favor of employees who are officers, shareholders, or highly compensated.<br /> <br /> (2)&nbsp; No more than three years of employment are required for participation and the employment requirement for each employee is the same.<br /> <br /> (3)&nbsp; Eligible employees begin participation by the first day of the first plan year after the employment requirement is satisfied.<a href="#_ftn3" name="_ftnref3">³</a></blockquote><br /> Under the proposed regulations, a cafeteria plan does not discriminate in favor of highly compensated individuals if the plan benefits a group of employees who qualify under a reasonable classification established by the employer and the group of employees included in the classification satisfies the safe harbor&nbsp;percentage test or the unsafe harbor&nbsp;percentage test.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> If a cafeteria plan offers health benefits, the plan is not discriminatory as to contributions and benefits if:<br /> <p style="padding-left: 40px;">(1)&nbsp; contributions for each participant include an amount that either:</p><br /> <p style="padding-left: 80px;">(x)&nbsp; equals 100&nbsp;percent of the cost of the health benefit coverage under the plan of the majority of the highly compensated participants who are similarly situated (e.g., same family size); or</p><br /> <p style="padding-left: 80px;">(y)&nbsp; equals or exceeds 75&nbsp;percent of the cost of the most expensive health benefit coverage elected by any similarly-situated participant; and</p><br /> <p style="padding-left: 40px;">(2)&nbsp; contributions or benefits in excess of (1) above bear a uniform relationship to compensation.<a href="#_ftn5" name="_ftnref5">⁵</a></p><br /> A plan is considered to satisfy all discrimination tests if it is maintained under a collective bargaining agreement between employee representatives and one or more employers.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> Further, a &ldquo;key employee,&rdquo; as defined for purposes of the top-heavy rules, is treated as though he or she is in constructive receipt of the available cash benefit option in any plan year in which nontaxable benefits provided under the plan to key employees exceed 25&nbsp;percent of the aggregate of such benefits provided to all employees under the plan. In making this calculation, excess group term life insurance coverage that is includable in income (<em><em>see</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8782">8782</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8783">8783</a>) is not considered a nontaxable benefit.<a href="#_ftn7" name="_ftnref7">⁷</a><br /> <br /> Employees of a controlled group of corporations, employers under common control, or members of an &ldquo;affiliated service group&rdquo; are treated as employed by a single employer.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> Employer contributions include amounts that the employer contributes to a cafeteria plan pursuant to a salary reduction agreement to the extent that the agreement relates to compensation that has not been actually or constructively received by the employee as of the date of the agreement if such compensation does not subsequently become currently available to the employee.<a href="#_ftn9" name="_ftnref9">⁹</a><br /> <br /> <em><em>See</em></em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8900">8900</a> for the application of the nondiscrimination requirements to simple cafeteria plans.<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; IRC &sect;&nbsp;125(b)(1); Prop.&nbsp;Treas. Reg. &sect;&nbsp;1.125-7(m)(2).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp; IRC &sect;&nbsp;125(e); Prop.&nbsp;Treas. Reg. &sect;&nbsp;1.125-7(a)(3); Notice 2018-83, Notice 2019-59, Notice 2020-79, Notice 2021&mdash;61, Notice 2022-55, Notice 2023-75.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp; IRC &sect;&nbsp;125(g)(3); Prop.&nbsp;Treas. Reg. &sect;&nbsp;1.125-7(b).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp; Prop.&nbsp;Treas. Reg. &sect;&nbsp;1.125-7(b)(1).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp; IRC &sect;&nbsp;125(g)(2); Prop.&nbsp;Treas. Reg. &sect;&nbsp;1.125-7(e).<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp; IRC &sect;&nbsp;125(g)(1).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp; IRC &sect;&nbsp;125(b)(2).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp; IRC &sect;&nbsp;125(g)(4).<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp; Prop.&nbsp;Treas. Reg. &sect;&nbsp;1.125-1(r).<br /> <br /> </div></div><br />