Client Alert Summer 2000 - Cafeteria (Section 125) Plans

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Client Alert - Summer 2000

Cafeteria (Section 125) Plans
By: George E. Barrett, CPA

Cafeteria plans allow employees to choose between cash and qualified benefits which are paid for with pretax dollars. Their popularity results from the fact that employees are not subject to federal unemployment tax or social security tax on qualified benefits. Employers do incur costs to administer a plan.

To qualify as a cafeteria plan the following requirements must be met:

The plan must be in writing.
Participants must be employees.
Two or more benefits consisting of cash and qualified benefits must be offered.
Participants must make elections to choose among the benefit options.
Deferred compensation cannot be provided as a benefit.

Qualified benefits which may be offered to participants include:

Flexible spending arrangements, subject to the use-it-or-lose-it rule, for health care expenses and/or dependent care.
Health and/or accident insurance.
Contributions to a 401(k) plan.
Group term life insurance up to $50,000.
Long term disability insurance.
Adoption assistance.
Dependent care assistance up to $5,000.

The Internal Revenue Service requires employers maintaining a cafeteria plan to file Form 5500 - Annual Return/Report of Employee Benefit Plan with Schedule F. Returns are due by the last day of the 7th calendar month after the end of the plan year.

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