17.5 Cafeteria Plans (Section 125)
Key Takeaways
- Cafeteria plans (§125) let employees choose between taxable cash and tax-free qualified benefits.
- Health FSA limit (2025): $3,300; maximum carryover (if elected): $660.
- Dependent Care FSA (2025): $5,000 ($2,500 MFS) — statutory, not indexed.
- Long-term care insurance CANNOT be offered through a cafeteria plan (§125(f)).
- Use-it-or-lose-it: Unused FSA funds forfeited unless carryover OR 2.5-month grace period adopted (not both).
- Salary-reduction contributions avoid federal income tax, Social Security, and Medicare taxes.
Last updated: May 2026
Why This Matters for the Exam
Cafeteria plans are heavily tested. Know what benefits can be offered, the 2025 FSA limits, and the use-it-or-lose-it rule.
Expect at least 2-3 questions on cafeteria plans.
What Is a Cafeteria Plan?
| Element | Description |
|---|---|
| Definition | Written plan allowing choice between cash and qualified benefits |
| Requirement | At least one taxable option + one qualified non-taxable benefit |
| Section | §125 |
Salary Reduction Mechanism
| Effect | Result |
|---|---|
| Employee forgoes cash | Lower taxable salary |
| Employer pays benefit | With pre-tax dollars |
| Excludes | Federal income tax, SS, Medicare |
Qualified Benefits (Can Be Offered)
| Benefit | Notes |
|---|---|
| Health insurance | Excluding long-term care |
| Health FSA | Medical, dental, vision expenses |
| Dependent Care FSA | Childcare while working/looking for work |
| Group-term life (first $50k) | Only first $50,000 of coverage |
| HSA contributions | If employee covered by HDHP |
Benefits That CANNOT Be Offered
| Benefit | Why Excluded |
|---|---|
| Long-term care insurance | §125(f) specifically excludes |
| Scholarships | Not a qualified benefit |
| Retirement contributions (401k) | Separate rules; not §125 qualified benefit |
Health FSA (Tax Year 2025)
| Element | Amount |
|---|---|
| Contribution limit | $3,300 |
| Carryover (if elected) | Up to $660 |
| Grace period (alternative) | 2.5 months |
| Cannot have both | Carryover OR grace period |
Dependent Care FSA (Tax Year 2025)
| Filing Status | Limit |
|---|---|
| Single/MFJ/HoH | $5,000 |
| MFS | $2,500 |
The Use-It-or-Lose-It Rule
| Aspect | Rule |
|---|---|
| FSA ownership | Employer-owned (subject to forfeiture) |
| Unused funds | Forfeited to employer at year-end |
| Exception | Carryover (up to $660 in 2025) or 2.5-month grace period |
Carryover vs. Grace Period
| Feature | Carryover | Grace Period |
|---|---|---|
| Time | Indefinite | 2.5 months |
| Amount | $660 max (2025) | Full balance |
| Use | Any qualifying expense | Prior-year expenses |
Real-World Scenario
Scenario: Employee contributes $3,300 to Health FSA in 2025. Only spends $2,800.
- Carryover option: $500 carries to next year (under $660 limit).
- Grace period option: Has until March 15, 2026 to use remaining $500.
- Neither option: $500 is forfeited.
On the Exam
Expect 2-3 questions on cafeteria plans, typically:
- Excluded Benefit Questions: "Which CANNOT be in a cafeteria plan?"
- FSA Limit Questions: "What is the 2025 Health FSA limit?"
- Carryover Questions: "What is the maximum Health FSA carryover for 2025?"
The key is to remember: Long-term care = NOT allowed. Health FSA = $3,300, carryover $660 (2025). Dependent Care = $5,000 (statutory). Use-it-or-lose-it applies.
Test Your Knowledge
Which benefit CANNOT be offered through a cafeteria plan?
A
B
C
D
Test Your Knowledge
Tax Year 2025 maximum Dependent Care FSA contribution (MFJ)?
A
B
C
D
Test Your Knowledge
Tax Year 2025 maximum Health FSA carryover?
A
B
C
D