§ 125. Cafeteria plans
(a)
General rule
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.
(b)
Exception for highly compensated participants and key employees
(1)
Highly compensated participants
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—
(2)
Key employees
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 statutory nontaxable 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, statutory nontaxable benefits shall be determined without regard to the second sentence of subsection (f).
(c)
Discrimination as to benefits or contributions
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.
(d)
Cafeteria plan defined
For purposes of this section—
(2)
Deferred compensation plans excluded
(A)
In general
The term “cafeteria plan” does not include any plan which provides for deferred compensation.
(B)
Exception for cash and deferred arrangements
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.
(C)
Exception for certain plans maintained by educational institutions
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—
For purposes of section
79, any life insurance described in the preceding sentence shall be treated as group-term life insurance.
(e)
Highly compensated participant and individual defined
For purposes of this section—
(1)
Highly compensated participant
The term “highly compensated participant” means a participant who is—
(B)
a shareholder owning more than 5 percent of the voting power or value of all classes of stock of the employer,
(D)
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).
(2)
Highly compensated individual
The term “highly compensated individual” means an individual who is described in subparagraphs [1] (A), (B), (C), or (D) of paragraph (1).
(f)
Qualified benefits defined
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. Such term shall not include any product which is advertised, marketed, or offered as long-term care insurance.
(g)
Special rules
(1)
Collectively bargained plan not considered discriminatory
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.
(2)
Health benefits
For purposes of subparagraph (B) of subsection (b)(1), a cafeteria plan which provides health benefits shall not be treated as discriminatory if—
(3)
Certain participation eligibility rules not treated as discriminatory
For purposes of subparagraph (A) of subsection (b)(1), a classification shall not be treated as discriminatory if the plan—
(B)
meets the requirements of clauses (i) and (ii):
(i)
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.
(ii)
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.
(4)
Certain controlled groups, etc.
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.
(h)
Special rule for unused benefits in health flexible spending arrangements of individuals called to active duty
(1)
In general
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 merely because such arrangement provides for qualified reservist distributions.
(2)
Qualified reservist distribution
For purposes of this subsection, the term “qualified reservist distribution” means,[2] any distribution to an individual of all or a portion of the balance in the employee’s account under such arrangement if—
(i)
Limitation on health flexible spending arrangements
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.
(j)
Simple cafeteria plans for small businesses
(1)
In general
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.
(2)
Simple cafeteria plan
For purposes of this subsection, the term “simple cafeteria plan” means a cafeteria plan—
(3)
Contribution requirements
(A)
In general
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—
(B)
Matching contributions on behalf of highly compensated and key employees
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.
(C)
Additional contributions
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).
(D)
Definitions
For purposes of this paragraph—
(i)
Salary reduction contribution
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.
(ii)
Qualified employee
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.
(4)
Minimum eligibility and participation requirements
(A)
In general
The requirements of this paragraph shall be treated as met with respect to any year if, under the plan—
(B)
Certain employees may be excluded
For purposes of subparagraph (A)(i), an employer may elect to exclude under the plan employees—
(iii)
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
(iv)
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).
(5)
Eligible employer
For purposes of this subsection—
(A)
In general
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.
(B)
Employers not in existence during preceding 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.
(C)
Growing employers retain treatment as small employer
(i)
In general
If—
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.
(l)
Regulations
The Secretary shall prescribe such regulations as may be necessary to carry out the provisions of this section.
[1] So in original. Probably should be “subparagraph”.
[2] So in original. The comma probably should not appear.