Q-1: What are the effective dates of these cafeteria plan rules?

A-1: Q&A-1 through Q&A-6 of this §1.125-2 apply to plan years of cafeteria plans set forth in Q&A-10 of §1.98 (a)-1 (regarding the effective date of section 89). Q&A-7 of this §1.125-2 (relating to flexible spending arrangements) applies to plan years beginning after December 31, 1989.

Q-2: What does section 125 of the Code provide?

A-2: In general, an employee who has an election amount nontaxable benefits and taxable benefits (including cash) must include in gross income any taxable benefits that the employee could have actually received pursuant to the employee's election. The amount of these benefits is included in the employee's income in the year in which the employee would have actually received the taxable benefits if the employee had elected such benefits. This generally is the result even if the employee's election between the nontaxable benefits and taxable benefits is made prior to the year in which the employee would have actually received the taxable benefits. However, section 125 provides that cash (including certain taxable benefits) provided under a non-discriminatory cafeteria plan will not be included in a participant's gross income merely because the participant has the opportunity, before the cash becomes currently available to the participant to choose cash and the nontaxable benefits under the cafeteria plan.

Q-3: What is a cafeteria plan under section 125?

A-3: A cafeteria plan is a plan maintained by an employer for the benefit of its employees that satisfies the requirements of section 89(k), under which all participants are employees, and under which each participant has the opportunity to choose among cash and qualified benefits. Additionally, a cafeteria plan satisfies the written plan document requirement of clause (v) of Q&A-3 of §1.125-1 only if the plan describes the maximum amount of elective contributions available to any employee under the plan either by stating the maximum dollar amount or maximum percentage of compensation that may be contributed as elective contributions under the plan by employees or by stating the method for determining the maximum amount or percentage of elective contributions that employees may make under the plan. The meaning of "elective contributions" under a cafeteria plan is the same as the meaning of "salary reduction contributions" under a cafeteria plan. See also paragraph (a)(2) of Q&A-8 of §1.89(a)-1.

Q-4: What benefits constitute qualified benefits and what benefits constitute cash under a cafeteria plan?

A-4: (a) Qualified benefits -

(1) In general. A benefit is a qualified benefit under a cafeteria plan if the benefit does not defer the receipt of compensation and the benefit is not includible in an employee's gross income by reason of an express provision of Chapter 1 of the Code. In the case of insurance-type benefits, such as benefits provided under accident or health plans (sections 106 and 105) are group-term life insurance plans (section 79), the benefit is the coverage under the plan.
(2) Items that constitute qualified benefits -

(i) Accident or health plans. Coverage under an accident or health plan is a qualified benefit to the extent that such coverage is excludable from income under section

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