§125 — Cafeteria plans
50 cases·8 followed·2 distinguished·2 overruled·38 cited—16% support
Statute Text — 26 U.S.C. §125
Except as provided in subsection (b), no amount shall be included in the gross income of a participant in a cafeteria plan solely because, under the plan, the participant may choose among the benefits of the plan.
In the case of a highly compensated participant, subsection (a) shall not apply to any benefit attributable to a plan year for which the plan discriminates in favor of—
highly compensated individuals as to eligibility to participate, or
highly compensated participants as to contributions and benefits.
In the case of a key employee (within the meaning of section 416(i)(1)), subsection (a) shall not apply to any benefit attributable to a plan for which the qualified benefits provided to key employees exceed 25 percent of the aggregate of such benefits provided for all employees under the plan. For purposes of the preceding sentence, qualified benefits shall be determined without regard to the second sentence of subsection (f).
For purposes of determining the taxable year of inclusion, any benefit described in paragraph (1) or (2) shall be treated as received or accrued in the taxable year of the participant or key employee in which the plan year ends.
For purposes of subparagraph (B) of subsection (b)(1), a cafeteria plan does not discriminate where qualified benefits and total benefits (or employer contributions allocable to qualified benefits and employer contributions for total benefits) do not discriminate in favor of highly compensated participants.
For purposes of this section—
The term “cafeteria plan” means a written plan under which—
all participants are employees, and
the participants may choose among 2 or more benefits consisting of cash and qualified benefits.
The term “cafeteria plan” does not include any plan which provides for deferred compensation.
Subparagraph (A) shall not apply to a profit-sharing or stock bonus plan or rural cooperative plan (within the meaning of section 401(k)(7)) which includes a qualified cash or deferred arrangement (as defined in section 401(k)(2)) to the extent of amounts which a covered employee may elect to have the employer pay as contributions to a trust under such plan on behalf of the employee.
Subparagraph (A) shall not apply to a plan maintained by an educational organization described in section 170(b)(1)(A)(ii) to the extent of amounts which a covered employee may elect to have the employer pay as contributions for post-retirement group life insurance if—
all contributions for such insurance must be made before retirement, and
such life insurance does not have a cash surrender value at any time.
For purposes of section 79, any life insurance described in the preceding sentence shall be treated as group-term life insurance.
Subparagraph (A) shall not apply to a plan to the extent of amounts which a covered employee may elect to have the employer pay as contributions to a health savings account established on behalf of the employee.
For purposes of this section—
The term “highly compensated participant” means a participant who is—
an officer,
a shareholder owning more than 5 percent of the voting power or value of all classes of stock of the employer,
highly compensated, or
a spouse or dependent (within the meaning of section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof) of an individual described in subparagraph (A), (B), or (C).
The term “highly compensated individual” means an individual who is described in subparagraph (A), (B), (C), or (D) of paragraph (1).
For purposes of this section—
The term “qualified benefit” means any benefit which, with the application of subsection (a), is not includible in the gross income of the employee by reason of an express provision of this chapter (other than section 106(b), 117, 127, or 132). Such term includes any group term life insurance which is includible in gross income only because it exceeds the dollar limitation of section 79 and such term includes any other benefit permitted under regulations.
The term “qualified benefit” shall not include any product which is advertised, marketed, or offered as long-term care insurance.
The term “qualified benefit” shall not include any qualified health plan (as defined in section 1301(a) of the Patient Protection and Affordable Care Act) offered through an Exchange established under section 1311 of such Act.
Subparagraph (A) shall not apply with respect to any employee if such employee’s employer is a qualified employer (as defined in section 1312(f)(2) of the Patient Protection and Affordable Care Act) offering the employee the opportunity to enroll through such an Exchange in a qualified health plan in a group market.
For purposes of this section, a plan shall not be treated as discriminatory if the plan is maintained under an agreement which the Secretary finds to be a collective bargaining agreement between employee representatives and one or more employers.
For purposes of subparagraph (B) of subsection (b)(1), a cafeteria plan which provides health benefits shall not be treated as discriminatory if—
contributions under the plan on behalf of each participant include an amount which—
equals 100 percent of the cost of the health benefit coverage under the plan of the majority of the highly compensated participants similarly situated, or
equals or exceeds 75 percent of the cost of the health benefit coverage of the participant (similarly situated) having the highest cost health benefit coverage under the plan, and
contributions or benefits under the plan in excess of those described in subparagraph (A) bear a uniform relationship to compensation.
For purposes of subparagraph (A) of subsection (b)(1), a classification shall not be treated as discriminatory if the plan—
benefits a group of employees described in section 410(b)(2)(A)(i), and
meets the requirements of clauses (i) and (ii):
No employee is required to complete more than 3 years of employment with the employer or employers maintaining the plan as a condition of participation in the plan, and the employment requirement for each employee is the same.
Any employee who has satisfied the employment requirement of clause (i) and who is otherwise entitled to participate in the plan commences participation no later than the first day of the first plan year beginning after the date the employment requirement was satisfied unless the employee was separated from service before the first day of that plan year.
All employees who are treated as employed by a single employer under subsection (b), (c), or (m) of section 414 shall be treated as employed by a single employer for purposes of this section.
For purposes of this title, a plan or other arrangement shall not fail to be treated as a cafeteria plan or health flexible spending arrangement (and shall not fail to be treated as an accident or health plan) merely because such arrangement provides for qualified reservist distributions.
For purposes of this subsection, the term “qualified reservist distribution” means any distribution to an individual of all or a portion of the balance in the employee’s account under such arrangement if—
such individual was (by reason of being a member of a reserve component (as defined in
section 101 of title 37
, United States Code)) ordered or called to active duty for a period in excess of 179 days or for an indefinite period, and
such distribution is made during the period beginning on the date of such order or call and ending on the last date that reimbursements could otherwise be made under such arrangement for the plan year which includes the date of such order or call.
For purposes of this section, if a benefit is provided under a cafeteria plan through employer contributions to a health flexible spending arrangement, such benefit shall not be treated as a qualified benefit unless the cafeteria plan provides that an employee may not elect for any taxable year to have salary reduction contributions in excess of $2,500 made to such arrangement.
In the case of any taxable year beginning after
December 31, 2013
, the dollar amount in paragraph (1) shall be increased by an amount equal to—
such amount, multiplied by
the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which such taxable year begins by substituting “calendar year 2012” for “calendar year 2016” in subparagraph (A)(ii) thereof.
If any increase determined under this paragraph is not a multiple of $50, such increase shall be rounded to the next lowest multiple of $50.
An eligible employer maintaining a simple cafeteria plan with respect to which the requirements of this subsection are met for any year shall be treated as meeting any applicable nondiscrimination requirement during such year.
For purposes of this subsection, the term “simple cafeteria plan” means a cafeteria plan—
which is established and maintained by an eligible employer, and
with respect to which the contribution requirements of paragraph (3), and the eligibility and participation requirements of paragraph (4), are met.
The requirements of this paragraph are met if, under the plan the employer is required, without regard to whether a qualified employee makes any salary reduction contribution, to make a contribution to provide qualified benefits under the plan on behalf of each qualified employee in an amount equal to—
a uniform percentage (not less than 2 percent) of the employee’s compensation for the plan year, or
an amount which is not less than the lesser of—
6 percent of the employee’s compensation for the plan year, or
twice the amount of the salary reduction contributions of each qualified employee.
The requirements of subparagraph (A)(ii) shall not be treated as met if, under the plan, the rate of contributions with respect to any salary reduction contribution of a highly compensated or key employee at any rate of contribution is greater than that with respect to an employee who is not a highly compensated or key employee.
Subject to subparagraph (B), nothing in this paragraph shall be treated as prohibiting an employer from making contributions to provide qualified benefits under the plan in addition to contributions required under subparagraph (A).
For purposes of this paragraph—
The term “salary reduction contribution” means, with respect to a cafeteria plan, any amount which is contributed to the plan at the election of the employee and which is not includible in gross income by reason of this section.
The term “qualified employee” means, with respect to a cafeteria plan, any employee who is not a highly compensated or key employee and who is eligible to participate in the plan.
The term “highly compensated employee” has the meaning given such term by section 414(q).
The term “key employee” has the meaning given such term by section 416(i).
The requirements of this paragraph shall be treated as met with respect to any year if, under the plan—
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, subject to terms and conditions applicable to all participants, elect any benefit available under the plan.
For purposes of subparagraph (A)(i), an employer may elect to exclude under the plan employees—
who have not attained the age of 21 before the close of a plan year,
who have less than 1 year of service with the employer as of any day during the plan year,
who are covered under an agreement which the Secretary of Labor finds to be a collective bargaining agreement if there is evidence that the benefits covered under the cafeteria plan were the subject of good faith bargaining between employee representatives and the employer, or
who are described in section 410(b)(3)(C) (relating to nonresident aliens working outside the United States).
A plan may provide a shorter period of service or younger age for purposes of clause (i) or (ii).
For purposes of this subsection—
The term “eligible employer” means, with respect to any year, any employer if such employer employed an average of 100 or fewer employees on business days during either of the 2 preceding years. For purposes of this subparagraph, a year may only be taken into account if the employer was in existence throughout the year.
If an employer was not in existence throughout the preceding year, the determination under subparagraph (A) shall be based on the average number of employees that it is reasonably expected such employer will employ on business days in the current year.
If—
an employer was an eligible employer for any year (a “qualified year”), and
such employer establishes a simple cafeteria plan for its employees for such year,
This subparagraph shall cease to apply if the employer employs an average of 200 or more employees on business days during any year preceding any such subsequent year.
then, notwithstanding the fact the employer fails to meet the requirements of subparagraph (A) for any subsequent year, such employer shall be treated as an eligible employer for such subsequent year with respect to employees (whether or not employees during a qualified year) of any trade or business which was covered by the plan during any qualified year.
Any reference in this paragraph to an employer shall include a reference to any predecessor of such employer.
All persons treated as a single employer under subsection (a) or (b) of section 52, or subsection (n) or (o) of section 414, shall be treated as one person.
For purposes of this subsection, the term “applicable nondiscrimination requirement” means any requirement under subsection (b) of this section, section 79(d), section 105(h), or paragraph (2), (3), (4), or (8) of section 129(d).
The term “compensation” has the meaning given such term by section 414(s).
For reporting and recordkeeping requirements, see section 6039D.
The Secretary shall prescribe such regulations as may be necessary to carry out the provisions of this section.
Treasury Regulations
- Treas. Reg. §Treas. Reg. §1.125-3 Effect of the Family and Medical Leave Act (FMLA) on the operation of cafeteria plans
- Treas. Reg. §Treas. Reg. §1.125-3(b) Coverage.
- Treas. Reg. §Treas. Reg. §1.125-3(c) Voluntary waiver of employee payments.
- Treas. Reg. §Treas. Reg. §1.125-3(d) Example.
- Treas. Reg. §Treas. Reg. §1.125-3(i) §1.125-3(i)
- Treas. Reg. §Treas. Reg. §1.125-4 Permitted election changes
- Treas. Reg. §Treas. Reg. §1.125-4(a) Election changes.
- Treas. Reg. §Treas. Reg. §1.125-4(b) Special enrollment rights—(1) In general.
- Treas. Reg. §Treas. Reg. §1.125-4(c) Changes in status—(1) Change in status rule.
- Treas. Reg. §Treas. Reg. §1.125-4(d) Judgment, decree, or order—(1) Conforming election change.
- Treas. Reg. §Treas. Reg. §1.125-4(e) Entitlement to Medicare or Medicaid.
- Treas. Reg. §Treas. Reg. §1.125-4(f) Significant cost or coverage changes—(1) In general.
- Treas. Reg. §Treas. Reg. §1.125-4(g) Special requirements relating to the Family and Medical Leave Act.
- Treas. Reg. §Treas. Reg. §1.125-4(h) Elective contributions under a qualified cash or deferred arrangement.
- Treas. Reg. §Treas. Reg. §1.125-4(i) Definitions.
- Treas. Reg. §Treas. Reg. §1.125-4(j) Effective date—(1) General rule.
- Treas. Reg. §Treas. Reg. §1.125-4(v) Residence.
50 Citing Cases
125(a) (limiting the availability of this provision to “a participant in a[n] [employer-provided] cafeteria plan”); sec. 1.125-1(g)(4), Proposed Income Tax Regs., 72 Fed. Reg. 43950 (Aug. 6, 2007) (providing that, for sec. 125 purposes, neither spouses nor dependents of employees are considered “participants in a cafeteria plan unless they are also employees”). 10As explained infra, sec. 265 does not provide this congressional “fix” as it is inapplicable to petitioner’s case.
As a resu t, petitioners did not recognize .a loss in 2002 on the E R call option (3032) pursuant to section 1256 .
301 (2005); Robinette v. Commissioner, 439 F.3d 455, 459 (8th Cir. 2006), rev'g 123 T.C. 85, 101 (2004); Keller v. Commissioner, 568 F.3d 710, 718 (9th Cir. 2009), aff'g in part T.C. Memo. 2006-166, and aff'g in part, vacating in part decisions in related cases. Goldberg resided in Illinois when he filed his petition. Therefore our decis
e Code". - 7 - [*7] The first amendment to the 1994 plan, effective October 6, 1994, defines compensation as including "any elective deferral and any amount which is contributed or deferred by the Employer at the election ofthe Employee by reason ofsection 125 or 147". The 2001 plan document defines "compensation" as: All W-2 wages paid to the Participant by the employer for the Plan Year and all earned income paid to self-employed individuals who are consideredto be employees under the provisio
Yes (reason) No Is the health benefit plan part of a plan or program for purposes of Section 125 or 106 of the IRS code?
nuses and over time [sic], etc ., but not including deferred compensation other than compensation deferred pursuant to Code Section 401(k) . Compensation shall also include salary reduction contributions excludable from gross income pursuant to Code Section 125 . " C. Other Relevant Provisions According to the STEP plan, a covered employee was purportedly eligible to receive a severance benefit from the plan upon termination of employment (except for termination for cause) under the following ci
nuses and over time [sic], etc ., but not including deferred compensation other than compensation deferred pursuant to Code Section 401(k) . Compensation shall also include salary reduction contributions excludable from gross income pursuant to Code Section 125 . " C. Other Relevant Provision s According to the STEP plan, a covered employee was purportedly eligible to receive a severance benefit from the plan upon termination of employment ( except for termination for cause) under the following
TLC sponsored certain employee benefits for its driver- employees, including: (1) A section 401(k) plan; (2) a section 125 flexible benefit plan; (3) group or individual health insur- ance; (4) a $5,000 group term life insurance policy; and (5) the option of purchasing additional group term life insurance.
TLC sponsored certain employee benefits for its driver-employees, including: (1) A section 401(k) plan; (2) a section 125 flexible benefit plan; (3) group or individual health insurance; (4) a $5,000 group term life insurance policy; and (5) the option of purchasing additional group term life insurance.
that the Commissioner had either actual notice or reason to know of the taxpayer's incapacity. Apparent authority, not otherwise terminated, ends when the third person has notice of the termination of the agent's authority. 1 Restatement, Agency 2d, sec. 125 (1957). A third person has notice when he knows, has reason to know, should know, or has been given a notification of the occurrence of an event from which, if reasonable, he would draw the inference that the principal does not consent to ha
The Existence of a Close Relationship Between Transferor and Transferee A conveyance is more likely to be fraudulent if there is a close relationship between the transferor and transferee. Scott v. Dansby, supra at 333; see Hagaman v. Commissioner, supra; Schad v. Commissioner, supra. There was a close relationship between House of Bab