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Cafeteria Plans

An Internal Revenue Code Section 125 Cafeteria Plan is a method of allowing employees to pay for qualified benefits on a pre-tax basis. In its simplest form, it is a premium only plan, which allows employees to pay for health insurance premiums before tax. In its most complicated form, an employer may offer employees flex credits to select among various benefits or a cash-out option.

Qualified Benefits

Qualified benefits that may be offered through a cafeteria plan include:

  • Accident and health benefits
  • Adoption assistance plans
  • Dependent care assistance plans
  • Group-term life insurance coverage
  • Health Savings Accounts (HSAs)


Written Plan Document Requirement

The Internal Revenue Code requires that a cafeteria plan be in writing prior to the plan's effective date. If a plan is not in writing or does not operate according to its written document, the newly proposed rules issued in 2007 indicate that the plan could lose its tax-favored status resulting in tax liability for the employees and employer.


When Can Employees Change Their Elections?

Participants in a cafeteria plan must be given the opportunity at least annually to make or change elections. This is typically during an open enrollment period. However, a cafeteria plan is not required to allow mid-year changes.

At minimum, a cafeteria plan must permit certain individuals who qualify for HIPAA Special Enrollment Rights to enroll in coverage. However, the cafeteria plan may be designed that the individual must pay for the coverage on a post-tax basis outside of the cafeteria plan until the next enrollment period. For more information on Special Enrollment Rights, please see the HIPAA section of this website.

Additionally, upon the decision of the plan sponsor and provision in the plan document, a cafeteria plan may permit mid-year changes based on the following events:

  • Change in status (including marital status, number of dependents, employment status, dependent ceases to satisfy eligibility requirements, change in residence, or adoption).
  • Change in cost with an automatic increase or decrease to employee contributions.
  • Significant cost changes.
  • Significant curtailment in coverage (including loss of coverage, increase in co-payments, or increase in co-insurance).
  • Addition or significant improvement of benefit options.
  • Change in coverage under other employer plan.
  • Loss of group health coverage through government or educational institution.
  • Entitlement to Medicare or Medicaid.
  • Leave of absence under FMLA or USERRA.

If the plan receives a judgment, decree, or order requiring coverage for an employee's dependent child, such as a Qualified Medical Child Support Order (QMCSO), the plan should allow the addition of coverage. However, as with the Special Enrollment Rights, the plan may decide that the individual must pay for the coverage on a post-tax basis outside of the cafeteria plan until the next enrollment period.

The change in election must be consistent with the event and the plan may allow "tag-along" changes for existing spouses and dependent children.

For assistance in setting up or maintaining a cafeteria plan for your employees, please contact your advisor. We can help answer your quailfying event questions, assist with documentation, and provide resources for the required annual discrimination testing.


Additional Resources

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This material was created by NFP, its subsidiaries, or affiliates for distribution by their Registered Representatives, Investment Advisor Representatives, and/or Agents. This material was created to provide accurate and reliable information on the subjects covered. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. Neither NFP Securities, Inc. nor NFP Benefits offer legal or tax services.

Securities offered through Registered Representatives of NFP Securities, Inc., a Broker/Dealer and Member FINRA/SIPC. Investment Advisory Services offered through Investment Advisory Representatives of NFP Securities, Inc. a Federally Registered Investment Adviser. NFP Benefits Partners is a division of NFP Insurance Services, Inc., which is a subsidiary of National Financial Partners Corp, the parent company of NFP Securities, Inc. NFP Securities, Inc. is not affiliated with any other entities listed on this document.

Not all of the individuals using this material are registered to offer Securities or Investment Advisory services through NFP Securities, Inc.