What Are the Main Rules About IRS Section 125?

Section 125 of the Internal Revenue Code defines rules that allow employers to offer cafeteria-style benefit plans to their employees, according to the IRS. Cafeteria plans include both taxable and nontaxable benefits.

Benefits offered on a pretax basis, also referred to as qualified benefits, include dependent care assistance, accident and health benefits, adoption assistance, group term life insurance and health savings accounts, as the IRS states. Qualified benefits are excluded from employee gross earnings under code provisions and are not deferred compensation. An employee’s contribution into a qualified benefit, such as a flexible spending arrangement, is taken from his earnings on a pretax basis and is not subject to FICA or FUTA.

All benefits offered in a cafeteria plan must be fully outlined within the plan along with clearly defined rules that govern eligibility and elections, according to the IRS. Eligible beneficiaries may include spouses and other qualified dependents of the employee, and they include former employees in some cases.

Benefits like flexible spending arrangements are governed by specific rules governing maximum and minimum contributions as well as rules that define time frames for taking advantage of the benefit contributions, states the IRS. Many FSAs have a rule that pretax contributions must be used by a certain date of the year and must not roll over into the following plan year.