A Section 125 cafeteria plan differs from
traditional employee benefit plans in that employees can customize their
benefits package. Any plan which allows employees to choose between
receiving taxable compensation and funding one or more tax-free benefits
is a Section 125 cafeteria plan. Another name for a Section 125 cafeteria plan is a Flexible
Benefit Plan.
The Section 125 cafeteria plan must be maintained by an employer
for the benefit of employees only, and must meet several conditions:
• The Section 125 cafeteria plan must be written.
• The Section 125 cafeteria plan must be available to all eligible employees.
• The Section 125 cafeteria plan must include two or more benefits consisting of cash and qualified
benefits.
The Section 125 Cafeteria Plan Qualifying Benefits
A The Section 125 cafeteria plan qualified benefit is any benefit which is
not includable in the gross income of the employee by an express statutory
exclusion (except educational assistance programs, scholarships, van
pooling, or excludable fringe benefits).
Qualifying benefits include:
• Group-term life insurance premium
costs.
• Disability income and accident insurance costs.
• Health insurance premium costs.
• Dental insurance premium costs.
• Medical costs not covered by insurance.
• Qualified dependent care costs.
• Contribution to a qualified 401(k) pension plan.
The Section 125 Cafeteria Plan Tax Considerations
Noncash benefits provided in a Section 125 cafeteria plan
will be nontaxable only if they satisfy the rules for exclusion of
the benefit under another code section. Each of the allowed Section 125 cafeteria plan
benefits could be provided under different code sections as nontaxable
employer-paid fringe benefits, and each must meet both the Section 125 cafeteria plan
qualifications and their individual requirements.
