FAQs for government entities regarding Cafeteria Plans
These frequently asked questions and answers are provided for general information only and should not be cited as any type of legal authority. They are designed to provide the user with information required to respond to general inquiries. Due to the uniqueness and complexities of Federal tax law, it is imperative to ensure a full understanding of the specific question presented, and to perform the requisite research to ensure a correct response is provided. The freely available Adobe Acrobat Reader software is required to view, print, and search the questions and answers listed below. |
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What is a cafeteria plan? A cafeteria plan is a separate written plan maintained by an employer for employees that meets the specific requirements of and regulations of section 125 of the Internal Revenue Code. It provides participants an opportunity to receive certain benefits on a pretax basis. Participants in a cafeteria plan must be permitted to choose among at least one taxable benefit (such as cash) and one qualified benefit.
The written plan must specifically describe all benefits and establish rules for eligibility and elections. Who may receive benefits under a cafeteria plan? The plan may make benefits available to employees, their spouses and dependents. It may also include coverage of former employees, but cannot exist primarily for them. See the questions below for treatment of benefits made available to individuals who are not spouses or dependents of the employee. Is there a filing requirement for a cafeteria plan? How does a cafeteria plan work? The above discussion provides only the most basic rules governing a cafeteria plan. For a complete understanding of the rules, see the Proposed Regulations under Code section 125. What is a flexible spending arrangement? A flexible spending arrangement (FSA) is a form of cafeteria plan benefit, funded by salary reduction, that reimburses employees for expenses incurred for certain qualified benefits. An FSA may be offered for dependent care assistance, adoption assistance, and medical care reimbursements. The benefits are subject to an annual maximum and are subject to an annual “use-or-lose” rule. The maximum amount of reimbursement which is reasonably available to a participant for such coverage must be less than 500 percent of the value of the coverage. In the case of an insured plan, the maximum amount reasonably available must be determined on the basis of the underlying coverage. An FSA cannot provide a cumulative benefit to the employee beyond the plan year. A town has a cafeteria plan (section 125 plan), which offers dependent care assistance. The benefits received by an employee exceed $5,000. How is this benefit reported on Form W-2? What remuneration under a cafeteria plan is not subject to FICA, FUTA, Medicare tax or income tax withholding? Generally, qualified benefits under a cafeteria plan are not subject to FICA, FUTA, Medicare tax, or income tax withholding. However, group-term life insurance that exceeds $50,000 of coverage is subject to social security and Medicare taxes, but not FUTA tax or income tax withholding, even when provided as a qualified benefit in a cafeteria plan. Adoption assistance benefits provided in a cafeteria plan are subject to social security, Medicare, and FUTA taxes, but not income tax withholding. If an employee elects to receive cash instead of any qualified benefit, it is treated as wages subject to all employment taxes. For more information, see Publication 535, Chapter 5 or Publication 15-A . Can a cafeteria plan make advance reimbursements for medical expenses? No. Employees can only be reimbursed for allowable, documented expenses incurred during the plan year, after the expenses have been substantiated. A town has a cafeteria plan which offers health care benefits to domestic partners. Does a domestic partner and his or her child qualify to be covered under the health plan? Cafeteria plans can offer health insurance to employees, their spouses and their dependents. The domestic partner and dependents in this case may not be participants in a cafeteria plan because they are not employees, but the plan may provide benefits to them. For example, a domestic partner may not be given the opportunity to select or purchase benefits offered by the plan, but the domestic partner may benefit from the employee’s selection of family medical insurance coverage or of coverage under a dependent care assistance program. |