Section
125. Cafeteria Plans
(of the Internal Revenue Code)
Under
Section 125 of the tax code, employers are allowed to establish cafeteria
benefits plan. This plan must allow participants to choose among two or more
benefits or cash and qualified benefits. Benefits that would not be taxed by
themselves are not taxed, while items such as cash are considered income and are
taxed. The only deferred compensation in a cafeteria plan is a Section 401(k)
plan.
The "qualified benefits" permitted to be offered in a cafeteria plan
are group- term life insurance, medical, accident, and disability benefits;
group legal services; and dependent care assistance.
Section 125
(a) General Rule.
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Except as
provided in Subsection (b), no amount shall be included in the gross
income of a participant in a Cafeteria Plan solely because, under the
Plan, the participant may choose among the benefits of the Plan.
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(b) Exception For Highly Compensated
Participants.
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(1)
Highly Compensated Participants.
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In the case of
a highly compensated participant, Subsection (a) shall not apply to any
benefit attributable to a Plan Year for which the Plan discriminates in
favor of
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(A)
highly compensated individuals as to
eligibility to participate, or
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(B)
highly compensated participants as to
contributions and benefits.
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In the case of
a key employee (within the meaning of Section 416(i)(1)), Subsection (a)
shall not apply to any Plan Year if the qualified benefits provided to key
employees under the Plan exceed 25 percent of the aggregate of such
benefits provided for all employees under the Plan. For purposes of the
preceding sentence, statutory nontaxable benefits shall be determined
without regard to the last sentence of Subsection (f).
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For purposes of
determining the taxable year of inclusion, any benefit described in
Paragraph (1) or (2) shall be treated as received or accrued in the
taxable year of the participant or key employee in which the Plan Year
ends.
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(c) Discrimination As To Benefits Or
Contributions.
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For purposes of
Subparagraph (B) of Subsection (b)(1), a Cafeteria Plan does not
discriminate where qualified benefits and total benefits (or employer
contributions allocable to statutory nontaxable benefits and employer
contributions for total benefits) do not discriminate in favor of highly
compensated participants.
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(d) Cafeteria Plan Defined.
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For purposes of
this Section--
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The term
"Cafeteria Plan" means a written Plan under which--
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(A)
all participants are employees, and
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(B)
the participants may choose among 2 or
more benefits consisting of cash and qualified benefits.
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(2)
Deferred Compensation Plans Excluded.
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(A)
In General. The term "Cafeteria
Plan" does not include any Plan which provides for deferred
compensation.
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(B)
Exception For Cash And Deferred
Arrangements.. Subparagraph (A) shall not apply to a profit-sharing or
stock bonus Plan or rural electric cooperative Plan (within the meaning
of Section 401(k)(7)) which includes a qualified cash or deferred
arrangement (as defined in Section 401(k)(2)) to the extent of amounts
which a covered employee may elect to have the employer pay as
contributions to a trust under such Plan on behalf of the employee.
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(C)
Exception For Certain Plans Maintained By
Educational Institutions. Subparagraph (A) shall not apply to a Plan
maintained by an educational organization described in Section
170(b)(1)(A)(ii) to the extent of amounts which a covered employee may
elect to have the employer pay as contributions for post-retirement
group life insurance if--
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(i)
all contributions for such insurance must be
made before retirement, and
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(ii)
such life insurance does not have a cash
surrender value at any time. For purposes of Section 79, any life
insurance described in the preceding sentence shall be treated as
group-term life insurance.
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(e) Highly Compensated Participant And
Individual Defined.
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For purposes of
this Section,
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(1)
Highly compensated participant. The
term, "highly compensated participant," means a participant who
is--
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(B)
a shareholder owning more than 5 percent
of the voting power or value of all classes of stock of the employer,
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(C)
highly compensated, or
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(D)
a spouse or dependent (within the meaning
of Section 152) of an individual described in Subparagraph (A), (B), or
(C).
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(2)
Highly compensated individual. The
term "highly compensated individual" means an individual who is
described in Subparagraph (A), (B), (C), or (D) of Paragraph (1).
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(f) Qualified Benefits Defined.
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For purposes of
this Section, the term "qualified benefit" means any benefit
which, with the application of Subsection (a), is not includible in the
gross income of the employee by reason of an express provision of this
chapter (other than Section 106(b), 117, 127, or 132). Such term includes
any group term life insurance which is includible in gross income only
because it exceeds the dollar limitation of Section 79 and such term
includes any other benefit permitted under regulations. Such term shall
not include any product which is advertised, marketed, or offered as
long-term care insurance.
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(g) Special Rules.
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(1)
Collectively Bargained Plan Not
Considered Discriminatory.
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For purposes
of this Section, a Plan shall not be treated as discriminatory if the
Plan is maintained under an agreement which the Secretary finds to be a
collective bargaining agreement between employee representatives and one
or more employers.
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For purposes
of Subparagraph (B) of Subsection (b)(1), a Cafeteria Plan which
provides health benefits shall not be treated as discriminatory if--
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(A)
contributions under the Plan on behalf of
each participant include an amount which--
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(i)
equals 100 percent of the cost of the health
benefit coverage under the Plan of the majority of the highly compensated
participants similarly situated, or
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(ii)
equals or exceeds 75 percent of the cost
of the health benefit coverage of the participant (similarly situated)
having the highest cost health benefit coverage under the Plan, and
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(B)
contributions or benefits under the Plan
in excess of those described in Subparagraph (A) bear a uniform
relationship to compensation.
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(3)
Certain Participation Eligibility Rules
Not Treated As Discriminatory.
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For purposes of
Subparagraph (A) of Subsection (b)(1), a classification shall not be
treated as discriminatory if the Plan--
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(A)
benefits a group of employees described in
Section 410(b)(2)(A)(i), and
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(B)
meets the requirements of clauses (i) and
(ii):
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(i)
No employee is required to complete more
than 3 years of employment with the employer or employers maintaining the
Plan as a condition of participation in the Plan, and the employment
requirement for each employee is the same.
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(ii)
Any employee who has satisfied the
employment requirement of clause (i) and who is otherwise entitled to
participate in the Plan commences participation no later than the first
day of the first Plan Year beginning after the date the employment
requirement was satisfied unless the employee was separated from service
before the first day of that Plan Year.
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(4)
Certain Controlled Groups, Etc.. All
employees who are treated as employed by a single employer under
Subsection (b), (c), or (m) of Section 414 shall be treated as employed by
a single employer for purposes of this Section.
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(h) Cross References.
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For reporting
and recordkeeping requirements, see Section 6039D.
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(i) Regulations.
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The Secretary
shall prescribe such regulations as may be necessary to carry out the
provisions of this Section.
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(Added Pub. L. 95-600, Title I, Section 134(a), Nov. 6, 1978, 92 Stat. 2783, and
amended Pub. L. 96-222, Title I, Section 101(a)(6)(A), Apr. 1, 1980, 94 Stat.
196; Pub. L. 96-605, Title II, Section 201(b)(2), 226(a), Dec. 28, 1980, 94
Stat. 3527, 3529; Pub. L. 96-613, Section 5(b)(2), Dec. 28, 1980, 94 Stat. 3581;
Pub. L. 98-369, div. A, Title V, Section 531(b)(1)-(4)(A), July 18, 1984, 98
Stat. 881, 882; Pub. L. 98-611, Section 1(d)(3)(A), Oct. 31, 1984, 98 Stat.
3177; Pub. L. 98-612, Section 1(b)(3)(B), Oct. 31, 1984, 98 Stat. 3181; Pub. L.
99-514, Title XI, Section 1151(d)(1), Title XVIII, Section 1853(b)(1), Oct. 22,
1986, 100 Stat. 2504, 2870; Pub. L. 100-647, Title I, Section 1011B(a)(11)-(13),
1018(t)(6), Title IV, Section 4002(b)(2), Title VI, Section 6051(b), Nov. 10,
1988, 102 Stat. 3484, 3485, 3589, 3643, 3696; Pub. L. 101-140, Title II, Section
203(a)(1), (3), (b)(2), Nov. 8, 1989, 103 Stat. 830, 831; Pub. L. 101-239, Title
VII, Section 7814(b), Dec. 19, 1989, 103 Stat. 2413; Pub. L. 101-508, Title XI,
Section 11801(c)(3), Nov. 5, 1990, 104 Stat. 1388-523; Pub. L. 104-191, Title
III, Section 301(d), 321(c)(1), 110 Stat. 1936.)
Last updated:
03-04
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