Cafeteria Plan – Fringe Benefits
A cafeteria plan, including an FSA, provides participants an opportunity to receive qualified benefits on a pre-tax basis. It is a written plan that allows your employees to choose between receiving cash or taxable benefits, instead of certain qualified benefits for which the law provides an exclusion from wages. If an employee chooses to receive a qualified benefit under the plan, the fact that the employee could have received cash or a taxable benefit instead won’t make the qualified benefit taxable.
Generally, a cafeteria plan doesn’t include any plan that offers a benefit that defers pay. However, a cafeteria plan can include a qualified 401(k) plan as a benefit. Also, certain life insurance plans maintained by educational institutions can be offered as a benefit even though they defer pay.
A cafeteria plan can include the following benefits discussed in section 2.
- Accident and health benefits (but not Archer medical savings accounts (Archer MSAs) or long-term care insurance).
- Adoption assistance.
- Dependent care assistance.
- Group-term life insurance coverage (including costs that can’t be excluded from wages).
- HSAs. Distributions from an HSA may be used to pay eligible long-term care insurance premiums or to pay for qualified long-term care services.
Benefits not allowed.
A cafeteria plan can’t include the following benefits discussed in section 2.
- Archer MSAs. See Accident and Health Benefits in section 2.
- Athletic facilities.
- De minimis (minimal) benefits.
- Educational assistance.
- Employee discounts.
- Employer-provided cell phones.
- Lodging on your business premises.
- No-additional-cost services.
- Retirement planning services.
- Transportation (commuting) benefits.
- Tuition reduction.
- Working condition benefits.
It also can’t include scholarships or fellowships (discussed in Pub. 970).
Contribution limit on a health FSA.
For plan years beginning in 2021, a cafeteria plan may not allow an employee to request salary reduction contributions for a health FSA in excess of $2,750.
A cafeteria plan that doesn’t limit health FSA contributions to the dollar limit isn’t a cafeteria plan and all benefits offered under the plan are includible in the employee’s gross income.
For more information, see Notice 2012-40, 2012-26 I.R.B. 1046, available at IRS.gov/irb/2012-26_IRB#NOT-2012-40.
“Use-or-lose” rule for health FSAs.
Instead of a grace period, you may, at your option, amend your cafeteria plan to allow an employee’s unused contributions to carry over to the immediately following plan year. For more information, see Notice 2013-71, 2013-47 I.R.B. 532, available at IRS.gov/irb/2013-47_IRB#NOT-2013-71, and Notice 2020-33, 2020-22 I.R.B. 868, available at IRS.gov/irb/2020-22_IRB#NOT-2020-33.
.See section 214 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 for information about temporary COVID-19 relief for health and dependent care FSAs. This legislation allows plans to be amended to provide the following relief to participants..
- Allow participants in health and dependent care FSAs to carry over any unused benefits or contributions remaining in the account from the plan year ending in 2020 to the plan year ending in 2021 and also from the plan year ending in 2021 to the plan year ending in 2022.
- Allow a 12-month grace period for unused benefits or contributions in health and dependent care FSAs for plan years ending in 2020 or 2021.
- Allow post-termination reimbursements from health FSAs from unused benefits or contributions for calendar year 2020 or 2021 through the end of the plan year in which an employee ceases participation in the plan.
- Extend the maximum age of eligible dependents from 12 to 13 for dependent care FSAs for the 2020 plan year and unused amounts from the 2020 plan year carried over into the 2021 plan year, or, for plans for which the end of the last regular enrollment period that occurred on or before January 31, 2020, was for the 2019 plan year, for the 2019 plan year and unused amounts from the 2019 plan year carried over into the 2020 plan year.
- Allow a change in the election amounts up to the maximum allowable amount for the year for health and dependent care FSAs for plan years ending in 2021.
Check IRS.gov to see if additional guidance is provided related to this relief.
For these plans, treat the following individuals as employees.
- A current common-law employee. See section 2 in Pub. 15.
- A full-time life insurance agent who is a current statutory employee.
- A leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control.
Exception for S corporation shareholders.
Don’t treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. A 2% shareholder for this purpose is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation’s stock or stock with more than 2% of the voting power. Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but don’t treat the benefit as a reduction in distributions to the 2% shareholder. For more information, see Revenue Ruling 91-26, 1991-1 C.B. 184.
Plans that favor highly compensated employees.
If your plan favors highly compensated employees as to eligibility to participate, contributions, or benefits, you must include in their wages the value of taxable benefits they could have selected. A plan you maintain under a collective bargaining agreement doesn’t favor highly compensated employees.
A highly compensated employee for this purpose is any of the following employees.
- An officer.
- A shareholder who owns more than 5% of the voting power or value of all classes of the employer’s stock.
- An employee who is highly compensated based on the facts and circumstances.
- A spouse or dependent of a person described in (1), (2), or (3).
Plans that favor key employees.
If your plan favors key employees, you must include in their wages the value of taxable benefits they could have selected. A plan favors key employees if more than 25% of the total of the nontaxable benefits you provide for all employees under the plan go to key employees. However, a plan you maintain under a collective bargaining agreement doesn’t favor key employees.
A key employee during 2021 is generally an employee who is either of the following.
- An officer having annual pay of more than $185,000.
- An employee who for 2021 is either of the following.
- A 5% owner of your business.
- A 1% owner of your business whose annual pay is more than $150,000.
Simple Cafeteria Plans for Small Businesses
Eligible employers meeting contribution requirements and eligibility and participation requirements can establish a simple cafeteria plan. Simple cafeteria plans are treated as meeting the nondiscrimination requirements of a cafeteria plan and certain benefits under a cafeteria plan.
You’re an eligible employer if you employed an average of 100 or fewer employees during either of the 2 preceding years. If your business wasn’t in existence throughout the preceding year, you’re eligible if you reasonably expect to employ an average of 100 or fewer employees in the current year. If you establish a simple cafeteria plan in a year that you employ an average of 100 or fewer employees, you’re considered an eligible employer for any subsequent year until the year after you employ an average of 200 or more employees.
Eligibility and participation requirements.
These requirements are met if all employees who had at least 1,000 hours of service for the preceding plan year are eligible to participate and each employee eligible to participate in the plan may elect any benefit available under the plan. You may elect to exclude from the plan employees who:
- Are under age 21 before the close of the plan year,
- Have less than 1 year of service with you as of any day during the plan year,
- Are covered under a collective bargaining agreement if there is evidence that the benefits covered under the cafeteria plan were the subject of good-faith bargaining, or
- Are nonresident aliens working outside the United States whose income didn’t come from a U.S. source.
You must make a contribution to provide qualified benefits on behalf of each qualified employee in an amount equal to:
- A uniform percentage (not less than 2%) of the employee’s compensation for the plan year; or
- An amount that is at least 6% of the employee’s compensation for the plan year or twice the amount of the salary reduction contributions of each qualified employee, whichever is less.
If the contribution requirements are met using option (2), the rate of contribution to any salary reduction contribution of a highly compensated or key employee can’t be greater than the rate of contribution to any other employee.
For more information about cafeteria plans, see section 125 of the Internal Revenue Code and its regulations.