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What Benefits can be Paid Pre-Tax Through a Cafeteria Plan?
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Cafeteria Plans allow employees to elect “qualified benefits” offered by their employer, and those qualified benefits may be paid for with pre-tax contributions by employees. Employees generally save on state income taxes, federal income taxes, and FICA taxes (i.e., Medicare and Social Security taxes). Employers also reduce their FICA taxes when a Cafeteria Plan is in place, so it is usually a win-win for all parties.
So, what are the qualified benefits that can be offered under a Cafeteria Plan? The following list illustrates some of the benefits that can be paid with pre-tax contributions by employees. This list is not intended to be an exhaustive list.
- Group health insurance
- Group dental insurance
- Group vision insurance
- Health Flexible Spending Account (Health FSA) contributions
- Dependent Care Flexible Spending Account (DC FSA) contributions
- Health Savings Account (HSA) contributions
- Accidental Death & Dismemberment (AD&D) coverage
- Adoption assistance benefits
- COBRA coverage for the employee, their spouse, or their dependent children (to the extent there is compensation that can be withheld pre-tax from the employee)
- Paid time off (PTO) days
- 401(k) contributions
The following list illustrates some of the benefits that can be paid with pre-tax contributions by employees, but there are some caveats to consider. This list is not intended to be an exhaustive list.
- Short-term disability (STD) and Long-term disability (LTD) insurance – Disability insurance benefits are taxable to employees if the premiums are paid with pre-tax contributions.
- Hospital indemnity and cancer insurance – Benefits paid in excess of unreimbursed medical expenses are taxable to employees if the premiums are paid with pre-tax contributions.
- Group term life insurance – Up to $50,000 of coverage may be paid with pre-tax contributions. If amounts in excess of $50,000 in coverage can be paid with pre-tax contributions, the value of coverage is imputed as income to employees and subject to taxes according to a table created by the IRS.
As a best practice, employers may want to have these plans paid with after-tax employee contributions.
The following list illustrates some of the benefits that cannot be paid with pre-tax contributions by employees through a Cafeteria Plan. This list is not intended to be an exhaustive list.
- Individual Marketplace coverage
- Commuter benefits (though can be offered pre-tax under a different provision of the IRS Code)
- Group life insurance that provides permanent benefits or a return of premium feature
- Group life insurance benefits of non-employees (e.g., spouse or children of the employee)
- Long-term care insurance
- Medicare premiums (generally cannot due to Medicare Secondary Payer rules)
- Pre-paid legal services
- Short-term medical insurance