Authors: James R. Storey, Education and Public Welfare Division
Abstract: Flexible benefit (or flex) plans: also called "cafeteria plans," offer employers a way
to offer employees a choice between taxable wages and nontaxable fringe benefits without
tax consequences to employees. Ordinarily, tax rules require taxation of employee compensation in the year earned, even if paid in a nontaxable form, if the employee could have received that compensation in a taxable form such as cash wages. Section 125 of the U.S. Internal Revenue Code waives taxation of this flexible compensation if paid by a plan that complies with its terms. Participants in section 125 plans are not taxed on the wages they forego to receive added coverage from nontaxable components of the flex plan, such as health insurance, life insurance, or disability insurance.
Pages: 2
Date: July 27, 1994
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