Chapter 39
CAFETERIA PLAN
LEARNING OBJECTIVES:
A. Identify key facts related to cafeteria plans
REVIEW:
This chapter begins by covering when a cafeteria plan might be used, and
highlights flexibility and employee satisfaction. Advantages and disadvantages
are discussed next, with a key disadvantage being the complex tax requirements.
The next section provides an example of a cafeteria plan, and is followed by tax
implications. Two primary tax implications include tax-free benefits that cannot be
included and nondiscrimination requirements. Alternatives, including the FSA,
are identified. Plan setup is discussed next, and is followed by two references for
learning more.
CHAPTER OUTLINE:
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
What Is It?
When Is It Indicated?
Advantages
Disadvantages
Example of Cafeteria Plan
Tax Implications
Alternatives
How Are These Plans Set Up?
How Do I Find Out More About These Plans?
Chapter Endnotes
FEATURED TOPICS:
Cafeteria plans
1
Chapter 39
CFP® CERTIFICATION EXAMINATION TOPIC:
Topic 30: Other employee benefits
A. Cafeteria plans and flexible spending accounts
COMPETENCY:
Upon completion of this chapter, the student should be able to:
1.
Identify key facts related to cafeteria plans
KEY WORDS:
cafeteria plan, IRC Section 125
DISCUSSION:
1. Discuss the benefits and advantages provided by cafeteria plans,
along with potential disadvantages.
2. Discuss types of tax-free benefits that cannot be provided in a cafeteria
plan.
QUESTIONS:
1. Under which of the following situations may key employees lose tax benefits
under a cafeteria plan?
(1) if the plan provides them with a comprehensive benefit package
(2) if they are provided more than 25% of aggregate plan benefits
(3) when the plan discriminates in favor of highly compensated employees
(4) when life insurance benefits are provided
a.
b.
c.
d.
(1) and (2) only
(1) and (3) only
(2) and (3) only
(2) and (4) only
Chapter 39, p. 305
Chapter 39
2. What are the tax implications for an employee if the terms of Section 125 are
not met in a cafeteria plan?
a.
b.
c.
d.
no term life insurance benefit will be available
only nontaxable plan benefits will be made available
there will be an exception from the constructive receipt doctrine
the employee will be taxed on the value of any available taxable plan
benefits
Chapter 39, p. 306
3. Which of the following benefits may not normally be provided in a cafeteria
plan under the Code?
(1) long-term care insurance
(2) educational assistance under a plan governed by Section 127
(3) dental insurance for dependents
(4) term insurance equal to 1½ times salary
a.
b.
c.
d.
(1) and (2) only
(1) and (3) only
(2) and (3) only
(2) and (4) only
Chapter 39, p. 306
4. Which one of the following is the result if nondiscrimination tests are not met
by the cafeteria plan?
a. nontaxable benefits remain nontaxable to highly compensated
employees
b. nontaxable benefits remain nontaxable to regular employees
c. all benefits become taxable to all employees
d. the plan is disqualified and must be discontinued
Chapter 39, p. 306
ANSWERS:
1. c
2. d
3. a
4. b