Are Cafeteria plans subject to FICA, ERISA or FUTA?

Cafeteria plans are employer-sponsored benefit plans that provide both taxable and nontaxable, or qualified, benefit options for employees. Cafeteria plan benefits, therefore, may be subject to Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) taxes. If a plan participant chooses the taxable benefit, which is typically cash, the benefit amount is subject to all the income and payroll taxes that apply to wages. Though less common than 401(k) plans offered by many employers, cafeteria plans are still covered under the Employee Retirement Income Security Act (ERISA) and are subject to the same regulations as other qualified plans.

Because cafeteria plans, also called Section 125 plans, are covered under ERISA, they are subject to the same documentation, reporting and administration requirements as all other ERISA plans, such as 401(k), 401(a) and 403(b) plans; simplified employee pension (SEP) plans; and profit-sharing plans. ERISA requires all participating employees to be provided with a summary plan description within 90 days of plan enrollment. This document must also be filed with the Department of Labor. In addition, ERISA provides a number of protections for cafeteria plan benefits, including the preemption of state escheatment laws.

Social Security and Medicare payroll taxes are collectively referred to as FICA. In general, qualified cafeteria plan benefits are not subject to FICA or other taxes. However, FICA taxes still apply to certain benefits. For example, group term life insurance benefits that exceed $50,000 are subject to Social Security and Medicare withholding, as are adoption assistance benefits.

The federal unemployment insurance program is paid through the FUTA tax, which is charged to employers, not employees. Like FICA taxes, most qualified cafeteria plan benefits are not subject to FUTA. However, adoption assistance benefits are subject to FUTA, in addition to FICA, but not income tax withholding.