Are Cafeteria Plans Subject to ERISA, FICA, or FUTA?

When you sign up to work for a company, one of the first things you're likely to do is to enroll in your benefits plan. These employer-sponsored benefits are just some of the perks many companies offer their workers. They generally range from insurance benefits—medical, dental, and disability insurance coverage—to retirement benefits, as well as those that can help you out with life events like adoption assistance.

These options are collectively known as a cafeteria plan. Despite the name, they have nothing to do with food. Instead, it's derived from the notion that employers allow employees to choose their benefits before any taxes are deducted—just like you would with a meal at a cafeteria. But before you choose, you should be aware of what this means for your bottom line.

Read on to find out whether cafeteria plans are subject to the Employee Retirement Income Security Act (ERISA), Federal Insurance Contributions Act (FICA), and Federal Unemployment Tax Act (FUTA), and how.

Key Takeaways

  • Cafeteria plans are employer-sponsored benefit plans that provide employees with different taxable and nontaxable pretax benefits.
  • Participants may be subject to ERISA regulations, as well as FICA and FUTA taxes.
  • Since cafeteria plans are covered under ERISA, they are subject to the same documentation, reporting, and administration requirements as all other ERISA plans.
  • FICA taxes apply to certain benefits such as group term life insurance benefits that exceed $50,000 or adoption assistance benefits.
  • While most qualified cafeteria plan benefits are not, adoption assistance benefits are subject to FUTA.

What Is a Cafeteria Plan?

Cafeteria plans are employer-sponsored benefit plans that provide employees with different pretax benefits, both taxable and nontaxable. These plans, which are typically more flexible than others, are also referred to as flexible benefit plans or Section 125 plans.

According to the Internal Revenue Service (IRS), participants must be able to choose at least one option from a cafeteria plan. Options for cafeteria plans may include health savings accounts (HSAs), adoption assistance, group life insurance, and cash benefits.

If an employee takes nontaxable benefits, they won't be subject to any federal income taxes. But they do kick in if plan participants choose taxable benefits like cash. Employees may, therefore, be subject to FICA and FUTA taxes.

The benefit amount is subject to all the same 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 ERISA and are subject to the same regulations as other qualified plans.

Benefits are only subject to taxation if a participant takes a taxable option such as cash.

Cafeteria Plans and ERISA

The Employee Retirement Income Security Act of 1974 provides protection to investors and their retirement accounts. It ensures individuals and institutions that administer qualified plans do not misuse the assets. They are also responsible to keep plan participants informed about any changes and plan features at no charge.

ERISA also sets up minimum standards including vesting periods, funding, and benefit accrual. The act also provides a number of protections for cafeteria plan benefits, including the preemption of state escheatment laws. These are laws that require financial institutions to report inactivity to the state.

Because cafeteria plans are covered under ERISA, they are subject to the same documentation, reporting, and administration requirements as all other ERISA plans. These include 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.

Cafeteria Plans and FICA

Social Security and Medicare payroll taxes are collectively referred to as the Federal Insurance Contributions Act. This act mandates employers to contribute directly to and to make deductions from employee payroll to fund both programs.

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.

Cafeteria Plans and FUTA

The federal unemployment insurance program is paid through the FUTA tax, which is charged to employers rather than employees. FUTA allows for the taxation of businesses by the government to fund state unemployment agencies. These funds are then dispersed among unemployed individuals who claim unemployment compensation.

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.

Article Sources

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  1. Internal Revenue Service. "FAQs for government entities regarding Cafeteria Plans." Accessed Feb. 5, 2020.

  2. Internal Revenue Service. "Publication 15-B (2020), Employer's Tax Guide to Fringe Benefits," Page 3. Accessed Feb. 5, 2020.

  3. U.S. Department of Labor. "Employee Retirement Income Security Act (ERISA)." Accessed Feb. 4, 2020.

  4. U.S. Department of Labor. "Permissive Transfers of Uncashed Checks from ERISA Plans to State Unclaimed Property Funds," Page 2. Accessed Feb. 4, 2020.

  5. U.S. Department of Labor. "Reporting and Disclosure Guide for Employee Benefit Plans," Pages 2-17. Accessed Feb. 4, 2020. 

  6. Social Security Administration. "What is FICA?" Pages 1-2. Accessed Feb. 4, 2020.

  7. Internal Revenue Service. "Group-Term Life Insurance." Accessed Feb. 4, 2020.

  8. Internal Revenue Service. "Federal Unemployment Tax." Accessed Feb. 4, 2020.

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