Offering Employees Pre-Tax Benefits? You Need a Cafeteria Plan

With few exceptions, the premium costs paid by employees for group health benefits are paid with pre-tax dollars. In other words, the employee’s portion of healthcare premiums is taken out of the employee’s pay before the employer withholds taxes.

Using pre-tax dollars benefits employees because it results in a smaller tax burden. However, employers must not overlook that the federal tax rules require employers to adopt a written cafeteria plan in order for the employer to permit employees to elect to pay for certain eligible benefits with pre-tax dollars.

A cafeteria plan, as defined in the tax code, is a written plan permitting eligible employees to choose among two or more benefits consisting of cash and qualified benefits. Not all benefits fall under the umbrella of cafeteria plan rules, but many do, including: healthcare premiums, flex-spending accounts, dental and vision premiums, and employee and employer HSA contributions. Additionally, the cafeteria plan details the employee’s option to elect tax-favored benefits paid for with the employee’s pre-tax contributions and any employer contributions or credits. For example, if an employer offers reimbursement for dependent care expenses, the cafeteria plan would describe things such as the maximum reimbursement amount, the deadline to incur expenses, and the deadline to submit claims for reimbursement.

Without a written cafeteria plan, any employee-paid benefits must be paid with after-tax dollars and employer-provided flex credits will be taxable income to the employee. In the event of an IRS audit, failure to adopt a written cafeteria plan and comply with the tax code subjects employees to additional taxable compensation and employers to tax reporting and withholding penalties.

Although adopting a written cafeteria plan may seem daunting, the cost of compliance is relatively low compared with the potential penalty (and uncertainty) of noncompliance. Once the plan is created, there will be relatively modest ongoing time and expense necessary for updating the plan as the employer changes benefit offerings or changes occur to applicable tax rules.

If your company needs a cafeteria plan, contact Barrett McNagny to speak with one of our attorneys, who have experience assisting clients with their cafeteria plan documents and compliance assistance.

Barrett McNagny LLP

Legal Disclaimer

The information contained in the Barrett McNagny LLP website is for informational purposes only and should not be considered legal advice on any subject matter. Furthermore, the information contained on our website may not reflect the most current legal developments. You should not act upon this information without consulting legal counsel.

Your transmission and receipt of information on the Barrett McNagny LLP website, or sending an e-mail to one of our attorneys or staff, will not create an attorney-client relationship between you and Barrett McNagny LLP. If you need legal advice and want to establish an attorney-client relationship with Barrett McNagny LLP, please contact one of our attorneys by telephone, email, or other means of communication, and allow the attorney to confirm that the firm does not represent other persons or entities involved in the matter and that the firm is willing to accept representation. Until such confirmation is provided by one of our attorneys, you should not transmit information to us that you consider confidential. If you do provide information to us, and no attorney-client relationship is established, the information will not be considered confidential or privileged, and our receipt of such information will not preclude us from representing another client in a matter adverse to you.

Any links to other websites are not intended to be referrals or endorsements of those sites.

Privacy Policy

Terms of Use

ADA Compliance

Transparency Cover Rule: Machine-Readable Files

Contact Us
My name is
and I am a(n)
seeking legal counsel in the area of 
me at
as soon as you can.

Thank you for contacting us!

A representative will be in touch with you shortly.

An attorney-client relationship will NOT be formed merely by sending an email to Barrett McNagny, LLP or to any of its attorneys. Please do not send any information specific to your legal needs until you obtain approval from a Barrett McNagny, LLP attorney, as the content of such email will not be considered confidential or privileged. By sending us an email, you confirm your understanding of this notification. If you agree, you may use the e-mail links on this page to contact an attorney.