A cafeteria plan, including a flexible spending arrangement, is a written plan that allows 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 will not make the qualified benefit taxable.
Generally, a cafeteria plan does not 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.
Cafeteria Plans: Qualified Benefits
Qualified benefits include the following benefits:
- 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 cannot be excluded from wages), and/or
- Health savings accounts (HSAs). Distributions from an HSA may be used to pay eligible long-term care insurance premiums or qualified long-term care services.
Cafeteria Plans: Benefits Not Allowed
A cafeteria plan generally cannot include the following benefits:
- Archer medical savings accounts,
- Athletic facilities,
- De minimis (minimal) benefits,
- Educational assistance,
- Employee discounts,
- Lodging on your business premises,
- Moving expense reimbursements,
- No-additional-cost services,
- Transportation (commuting) benefits,
- Tuition reduction, or
- Working condition benefits.
It also cannot include scholarships or fellowships (discussed in the Internal Revenue Service's (IRS) Publication 970, Tax Benefits for Education).