What Is A Cafeteria Plan

Food!  I love food.  In fact, some could say, “Food is my best friend!  It’s there when I’m down to console me.  It’s there to help me celebrate stuff.  And when there is nothing to do, it’s there.”

First time I heard the term “Cafeteria Plan” years ago, I immediately thought it was about companies that offered a food service option on site as part of working there.

Its about offering a “menu” of fringe benefits for employees to pick and choose from.  (Disability Insurance, Dental Insurance, Cancer Insurance, Accident Insurance, Life Insurance, etc.)  Employees can sign up for the benefits that they truly value and skip over the ones they don’t want.

To participate in a company cafeteria plan, employees designate an amount to be deducted from their taxable salary to be used to purchase the benefits they want with.  That means, the portion of the employee’s pay is not subject to Federal Income Tax, Medicare Tax, Social Security Tax, Unemployment Tax, etc.

A “Cafeteria Plan” must be a separate written plan maintained by an employer for their employees under Section 125 of the Federal Tax Code.  It allows participants to receive certain benefits on a tax-free basis.  The written plan must clearly outline all benefits and set rules for eligibility and choices.  The benefits can be made available to employees, their spouses and dependents.

Contributions are made to the plan by salary reduction agreements between the employer and the employee in which the employee agrees to contribute a portion of their salary on a pre-tax basis to pay for the qualified benefits.

There are a couple of exceptions to the tax-free rule.  If the employee chooses group term life insurance that exceeds a benefit payout of $50,000, the excess premium is subject to Social Security and Medicare taxes, but not unemployment tax or federal income tax.  Also, adoption assistance benefits in such a cafeteria plan are subject to Social Security, Medicare, and unemployment, but not federal income tax.

So you’ve heard of Flexible Spending Accounts (FSA).  Actually, an FSA is a type of Cafeteria Plan.  The only big difference is the “use it or loose it” rule on an FSA.  Any amount left in an FSA at the end of the year is forfeited.  There is also a maximum dollar contribution limit to an FSA of $3,300 for 2026.  It can be as high as $7,500 if it is used for childcare benefits.  For a standard Cafeteria Plan, the max contribution is $3,400 and there is no provision for a larger amount going to childcare.  You can carry over a maximum amount of $680 to the next year.

Does your employer offer a Cafeteria Plan or an FSA?  You should take advantage of it.  If you’re an employer, do you currently offer your employees a Cafeteria Plan or an FSA?  If you, you should consider offering one.

Have you heard?  Psalms 147:9 says, “He provides food for the livestock, and for the young ravens when they call.”

Kelly Bullis is a Certified Public Accountant in Carson City.  Contact him at 775-882-4459.  As well as on our website at BullisAndCo.com. You can also find us on LinkedIn and Facebook.