Cafeteria plans let employees pay for benefits before tax.
Section 125 of the tax code allows employees to choose between cash and certain benefits and pay their share of premiums with pre-tax dollars.
The Basics for Employers.
A plain-English summary. This is general information, not legal advice, and the rules change, so check the current text.
A Written Plan
The plan needs a written document that spells out the benefits, eligibility and how elections work.
Elections Stay Put
Employees generally make elections before the plan year and can change them mid-year only for qualifying life events.
Nondiscrimination Testing
The plan cannot favor highly compensated or key employees, and testing is how that is checked.
How it plays out.
A cafeteria plan under Section 125 lets employees choose between taxable pay and certain tax-free benefits. The main benefit for most employers is that employee premium contributions come out before income and payroll taxes.
To get that treatment, the plan has to be written and has to follow election rules. Employees generally make elections before the plan year and can change them mid-year only for certain events, such as a change in family status.
The plan also has to pass nondiscrimination tests so it does not favor highly paid or key employees. Small employers sometimes assume they are exempt. Many are not, and the testing is often the part that gets skipped.
Where This Shows Up in Your Plan.
ERISA, ACA Reporting and Form 5500 Support
How we help with the filings, notices and plan documents.
Employer Benefits Guides: Eligibility, Plan Design, Life Events and Rules
Eligibility, plan design and life-event rules in one place.
Running the plan.
Adopt a Written Plan
Keep a current plan document on file.
Set Election Rules
Document when and how elections can change.
Run the Tests
Check nondiscrimination each year.
Match Payroll
Confirm payroll deductions follow the elections.
Mistakes to avoid.
No Written Plan
Without one, the tax treatment is at risk.
Mid-Year Changes Without an Event
Elections are generally locked unless a permitted event occurs.
Skipping Testing
Untested plans can lose tax benefits for some employees.
Other Rules Employers Work With.
Laws and Rules Referenced
Cafeteria Plans (26 U.S.C. 125) — The statute or rule text from its official or public source.
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