3.5 Cafeteria Plans

Participation Requirements and Nondiscrimination Testing

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Qualified benefits include:

Accident and health plans Dependent care assistance programs Group-term life insurance Short-term or long-term disability coverage Health Savings Accounts Elective contributions to a qualified Cash or Deferred Arrangement (only Section 401(k) plans) Elective vacation days Cash Flexible spending accounts (beginning January 1, 2013, Medical Flexible Spending Accounts Employee Contributions are limited to $2,500 annually) Adoption assistance The following benefits are not permitted to be included in a Section 125 cafeteria plan: Educational assistance plans Scholarship and fellowship grants Rides in commuter vans De minimis fringes No-additional-cost services Employee discounts Working condition fringes Deferred compensation arrangements (except under a qualified Section 401(k) plan) Qualified transportation fringe benefits (e.g., transit passes, parking, van pooling, bicycle commuting).

Pre-Tax Contributions

Any taxable benefits purchased become taxable when they become "currently available" to the employee. Pre-tax contributions do not reduce the amount of the taxable benefit that must be included in the employee's income. Pre-tax contributions made by an employee are considered to be employer contributions when determining the taxable value of a benefit.

discriminatory plans

Cafeteria plans that discriminate in favor of highly compensated individuals, employees, participants, or key employees are not disqualified and do not have negative tax consequences for other participants. But those highly compensated participants and key employee participants lose the tax benefits of the plan and are subject to tax (including federal income tax withholding and social security, Medicare, and FUTA taxes) on the combination of the taxable benefits with the highest total value they could have selected for the plan year.

ER Contributions

Employer contributions to a qualified cafeteria plan are excluded from the employee's income and are not subject to federal income tax withholding or employment taxes to the extent the contributions relate to nontaxable benefits selected by the employee. Employer contributions made to purchase taxable benefits must be included in the employee's income and are subject to federal income tax withholding and social security, Medicare, and FUTA taxes to the same extent as if they were made outside the plan

Reporting

Generally, pre-tax contributions to a cafeteria plan need not be reported by an employer on its quarterly Form 941 or an employee's Form W-2 as taxable wages. On the employer's annual Form 940, such contributions are included in Part 2, Line 3 in total payments and then in Part 2, Line 4 as an exempt payment. Taxable contributions and benefits are reported as they would be if they were provided outside the cafeteria plan.

Dependent Care Reporting

If an employee contributes to a dependent care assistance FSA through either pre-tax contributions or flex credits, the employer must report the amounts on the employee's Form W-2 in Box 10, with the excess over $5,000 reported as well in Boxes 1, 3, and 5.

Dependent care assistance.

If an employee contributes to a dependent care assistance FSA through either pre-tax contributions or flex credits, the employer must report the amounts on the employee's Form W-2 in Box 10, with the excess over $5,000 reported as well in Boxes 1, 3, and 5.Dependent care assistance.

CASH

If employees choose to take cash instead of purchasing benefits with their flex dollars, the payments are wages and are subject to federal income tax withholding and social security, Medicare, and FUTA taxes. The same holds true for purchased vacation days that are cashed out because the employee feels they will not be used before the year ends.

FSA use it or lose it

No Deferred Compensation— "Use It or Lose It" Because cafeteria plans cannot allow compensation to be deferred beyond the plan year, any amount in a health FSA that remains unused at the end of the plan year generally is forfeited by the employee (but see the "grace period" explanation below). It may not be used for the reimbursement of another benefit or carried over to a later year. This means employees must be very careful in estimating covered medical care and dependent care expenses when making a fund election before the beginning of each plan year. A grace period of up to 2½ months is permitted after the end of a plan year during which unused amounts in flexible spending accounts, including dependent care accounts, may be paid or reimbursed to plan participants for qualified benefit expenses incurred during the grace period. The grace period must be included in the employer's cafeteria plan document or it does not apply. The use of unused contributions in the grace period will not reduce the $2,500 contribution limit.

FSA uniform coverage

The maximum amount of reimbursement selected by a participating employee (that is, the total of the employee's payments for the plan year) must be available to the employee at all times during the plan year. The amount available is reduced each time the employee submits a claim for reimbursement. It does not matter how much the employee has paid into the FSA when the claim is made, and the premium payment schedule cannot be accelerated because of the employee's claims or because the employee separates from employment.

Highly Compensated

The term "highly compensated" means any individual or participant who for the preceding year was paid more than $115,000 by the employer. The employer can limit this group to the top-paid 20% of its employees for the preceding year. Key employees include these: corporate officers whose annual compensation is greater than $165,000 for 2013; 5% owners; and 1% owners whose annual earnings are greater than $150,000.

401k tax reporting

Therefore, they must be reported on the employee's Form W-2 in Boxes 3 and 5, respectively, with the amounts withheld reported in Boxes 4 and 6. The elective deferrals must also be reported in Box 12, preceded by Code "D." On Form 941, the employer must report the pre-tax contributions on Lines 5a column 1 and 5c column 1, since they are subject to social security and Medicare taxes. (For more information on 401(k) plans see Module 3).

Premium-Only Plans

These plans, known as POPs or premium conversion plans, are used by employers who require their employees to contribute toward benefits, usually health insurance. A POP (premium-only plan) generally does not offer a "menu" of benefits to choose from. It merely allows employees to pay for their share of the benefit costs on a pre-tax basis through a salary reduction in the amount of the required contribution. They are permissible under §125

FSA coverage

To qualify as an FSA, the benefit program must provide coverage under which specified expenses incurred by employees may be reimbursed up to certain maximums and subject to other reasonable conditions; and maximum reimbursement amounts cannot be substantially more than the total premium for the employee's coverage (including both employer- and employee-paid portions of the premium); less than 500% of the premium is allowed as a maximum reimbursement amount.