Cafeteria plans, or plans governed by IRS Code Section 125, allow employers to help employees pay for expenses such as health insurance with pre-tax dollars. Employees are given a choice between a taxable benefit (cash) and two or more specified pre-tax qualified benefits, for example, health insurance. Employees are given the opportunity to select the benefits they want, just like an individual standing in the cafeteria line at lunch.
Only certain benefits can be offered through a cafeteria plan: (1) coverage under an accident or health plan (which can include traditional health insurance, health maintenance organizations (HMOs), self-insured medical reimbursement plans, dental, vision, and more); (2) dependent care assistance benefits or DCAPs; (3) group term life insurance; (4) paid time off, which allows employees the opportunity to buy or sell paid time off days; (5) 401(k) contributions; (6) adoption assistance benefits; and (7) health savings accounts or HSAs under IRS Code Section 223.
Some employers want to offer other benefits through a cafeteria plan, but this is prohibited. Benefits that you cannot offer through a cafeteria plan include scholarships, group term life insurance for non-employees, transportation and other fringe benefits, long-term care, and health reimbursement arrangements (unless very specific rules are met by providing one in conjunction with a high deductible health plan). Benefits that defer compensation are also prohibited under cafeteria plan rules.
Cafeteria plans as a whole are not subject to ERISA, but all or some of the underlying benefits or components under the plan can be. The Patient Protection and Affordable Care Act (ACA) has also affected aspects of cafeteria plan administration.
Request UBA’s PPACA Advisor, “Cafeteria Plans: Change in Status and Changing Employee Elections” for comprehensive information on how the law affects:
- Making election changes (including consistency rules, plan recognition of the change, documentation requirements and timing)
- Qualifying change of status events
- Other events that allow a change in elections (do you know all 13, including the including the new reduction in hours and Exchange/Marketplace enrollment events allowed by the Affordable Care Act?)
Be sure to get the latest information on how the ACA affects cafeteria plans.