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.
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.
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
Question types to practice on cafeteria plans:
- 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.
Which benefit CANNOT be offered through a cafeteria plan?
Health FSA
Dependent Care
Long-term care insurance
Group-term life (first $50k)
Tax Year 2025 maximum Dependent Care FSA contribution (MFJ)?
$2,500
$3,300
$5,000
$7,500
Tax Year 2025 maximum Health FSA carryover?
$100
$500
$660
$3,300 (full balance)
Sections you finish are checked off in the contents.