[Code of Federal Regulations]
[Title 26, Volume 2]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.125-2T]

[Page 522-523]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.125-2T  Question and answer relating to the benefits that may be 
offered under a cafeteria plan (temporary).

    Q-1: What benefits may be offered to participants under a cafeteria 
plan?
    A-1: (a) Generally, for cafeteria plan years beginning on or after 
January 1, 1985, a cafeteria plan is a written plan under which 
participants may choose among two or more benefits consisting of cash 
and certain other permissible benefits. In general, benefits that are 
excludable from the gross income of an employee under a specific section 
of the Internal Revenue Code may be offered under a cafeteria plan. 
However, scholarships and fellowships under section 117, vanpooling 
under section 124, educational assistance under section 127 and certain 
fringe benefits under section 132 may not be offered under a cafeteria 
plan. In addition, meals and lodging under section 119, because they are 
furnished for the convenience of the employer and thus are not elective 
in lieu of other benefits or compensation provided by the employer, may 
not be offered under a cafeteria plan. Thus, a cafeteria plan may offer 
coverage under a group-term life insurance plan of up to $50,000 
(section 79), coverage under an accident or health plan (sections 105 
and 106), coverage under a qualified group legal services plan (section 
120), coverage under a dependent care assistance program (section 129), 
and participation in a qualified cash or deferred arrangement that is 
part of a profit-sharing or stock bonus plan (section 401(k)). In 
addition, a cafeteria plan may offer group-term life insurance coverage 
which is includable in gross income only because it is in excess of 
$50,000 or is on the lives of the participant's spouse and/or children. 
In addition, a cafeteria plan may offer participants the opportunity to 
purchase, with after-tax employee contributions, coverage under a group-
term life insurance plan (section 79), coverage under an accident or 
health plan (section 105(e)), coverage under a qualified group legal 
services plan (section 120), or coverage under a dependent care 
assistance program (section 129). Finally, a cafeteria plan may offer 
paid vacation days if the plan precludes any participant from using, or 
receiving cash for, in a subsequent plan year, any of such paid vacation 
days remaining unused as of the end of the plan year. For purposes of 
the preceding sentence, elective vacation days provided under a 
cafeteria plan are not considered to be used until all nonelective paid 
vacation days have been used.
    (b) Note that benefits that may be offered under a cafeteria plan 
may or may not be taxable depending upon whether such benefits qualify 
for an exclusion from gross income. However, a cafeteria plan may not 
offer a benefit that is taxable because such benefit fails to satisfy 
any applicable eligibility, coverage, or nondiscrimination

[[Page 523]]

requirement. Similarly, a plan may not offer a benefit for purchase with 
after-tax employee contributions if such benefit would fail to satisfy 
any eligibility, coverage, or nondiscrimination requirement that would 
apply if such benefit were designed to be provided on a nontaxable basis 
with employer contributions. Also, note that section 125(d)(2) provides 
that a cafeteria plan may not offer a benefit that defers the receipt of 
compensation (other than the opportunity to make elective contributions 
under a qualified cash or deferred arrangement) and may not operate in a 
manner that enables participants to defer the receipt of compensation.

[T.D. 8073, 51 FR 4318, Feb. 4, 1986]