Simple Cafeteria Plan for Small Businesses

§ 125. Cafeteria plans(a) General ruleExcept as provided in subsection (b), no amount shall be included in the gross income of a participant in a cafeteria plan solely because, under the plan, the participant may choose among the benefits of the plan. (b) Exception for highly compensated participants and key employees(1) Highly compensated participantsIn the case of a highly compensated participant, subsection (a) shall not apply to any benefit attributable to a plan year for which the plan discriminates in favor of—(A) highly compensated individuals as to eligibility to participate, or (B) highly compensated participants as to contributions and benefits. (2) Key employeesIn the case of a key employee (within the meaning of section 416(i)(1)), subsection (a) shall not apply to any benefit attributable to a plan for which the qualified benefits provided to key employees exceed 25 percent of the aggregate of such benefits provided for all employees under the plan. For purposes of the preceding sentence, qualified benefits shall be determined without regard to the second sentence of subsection (f). (3) Year of inclusionFor purposes of determining the taxable year of inclusion, any benefit described in paragraph (1) or (2) shall be treated as received or accrued in the taxable year of the participant or key employee in which the plan year ends. (c) Discrimination as to benefits or contributionsFor purposes of subparagraph (B) of subsection (b)(1), a cafeteria plan does not discriminate where qualified benefits and total benefits (or employer contributions allocable to qualified benefits and employer contributions for total benefits) do not discriminate in favor of highly compensated participants. (d) Cafeteria plan definedFor purposes of this section—(1) In generalThe term “cafeteria plan” means a written plan under which—(A) all participants are employees, and (B) the participants may choose among 2 or more benefits consisting of cash and qualified benefits. (2) Deferred compensation plans excluded(A) In generalThe term “cafeteria plan” does not include any plan which provides for deferred compensation. (B) Exception for cash and deferred arrangementsSubparagraph (A) shall not apply to a profit-sharing or stock bonus plan or rural cooperative plan (within the meaning of section 401(k)(7)) which includes a qualified cash or deferred arrangement (as defined in section 401(k)(2)) to the extent of amounts which a covered employee may elect to have the employer pay as contributions to a trust under such plan on behalf of the employee.