Part 13 · Chapter 2

Code Section 125 Cafeteria Plans

Law stated as of October 3, 2026 · COBRA, HIPAA, and Welfare Benefits

Scope and status

Indexed limits change annually and the core regulatory framework is proposed, not final — verify before relying on them.

Citations are to primary authority (Code §125; the final election-change and FMLA regulations at 26 C.F.R. §§1.125-3 and 1.125-4; and the 2007 proposed cafeteria-plan regulations, REG-142695-05, 72 Fed. Reg. 43938 (Aug. 6, 2007), which consolidate the framework but remain proposed). For dependent care FSAs, use this chapter together with the DCAP (§129/§125) chapter; for self-insured health-plan nondiscrimination, the self-insured-reforms chapter (§105(h)).

Regulatory-status caution: There are no comprehensive final §125 regulations. The 2007 proposed regulations are the working framework practitioners use. They are not binding final rules, but the preamble expressly permits taxpayers to rely on them pending final regulations (72 Fed. Reg. at 43944); the only final §125 regulations are the narrow election-change (§1.125-4) and FMLA (§1.125-3) rules. Flag this status whenever a position rests on the proposed regulations.

Sections

Part A is shown in full. The other sections are listed by title; their text is available to subscribers.

Part A — What a Cafeteria Plan Is

A1.The §125 bargain and why it matters

Part 13, ch. 2, § A1

A cafeteria plan is the only mechanism that lets an employee choose between cash (taxable) and one or more qualified (nontaxable) benefits without triggering the constructive-receipt doctrine that would otherwise tax the employee on the cash they could have elected. Statute: Code §125(a), (d). Without a compliant §125 plan, an employee who could elect cash instead of a §125 qualified benefit is taxed on the available cash even if they take the benefit (other statutes carry their own cash-choice rules, e.g., §132(f)(4) for qualified transportation fringes and §401(k) for elective deferrals).

A2.Qualified and nonqualified benefits

Part 13, ch. 2, § A2

Qualified benefits that may be offered are limited to those the Code excludes from income: accident and health coverage (including a health FSA), group-term life insurance (including coverage above the §79 $50,000 exclusion, whose imputed cost remains taxable), dependent care assistance (§129), adoption assistance, HSAs, and a few others. Statute: Code §125(f); Proposed reg — reliance authorized: Prop. §1.125-1. Nonqualified benefits cannot be offered through a cafeteria plan without disqualifying it — notably deferred compensation (the no-deferral rule, with narrow exceptions like HSA and certain FSA grace features), long-term care insurance, scholarships, and most fringe benefits. Statute: Code §125(d)(2), (f).

A3.The written-plan requirement

Part 13, ch. 2, § A3

A cafeteria plan must be in writing and adopted before the first day of the plan year to which it applies, and must state the benefits offered, eligibility and participation rules, election procedures, contribution method, the plan year, and FSA terms. Statute: Code §125(d)(1); Proposed reg — reliance authorized: Prop. §1.125-1(c). Operating a plan without a timely written document, or operating inconsistently with its terms, defeats §125 and makes elected amounts taxable.

A4.Who may participate

Part 13, ch. 2, § A4

Only employees (current and former, though a plan may not be established predominantly for former employees) may participate. Self-employed individuals — sole proprietors, partners, and more-than-2% S-corporation shareholders — cannot participate in a cafeteria plan or make pre-tax elections (they may still receive certain benefits outside §125). Statute: Code §125(d)(1)(A); Proposed reg — reliance authorized: Prop. §1.125-1(g). Spouses and dependents are not participants but may receive benefits.

The first Part of each chapter is open to everyone. The remaining sections, with their authority and practice points, are available to subscribers and to clients of ERISA Benefits Law Group, PLLC whose engagement includes access.