Chapter 27: Do You Have a Proper Cafeteria Plan?

The recent Ninth Circuit decision in Flores v. City of San Gabriel focused on the circumstances under which the value of certain non-cash-wage benefits (such as those provided under “cash-in-lieu” programs or cafeteria plans) must be included in the determination of FLSA overtime wages. We thought that many public agencies would be asking us about whether their cafeteria plans met the “bona fide plan” exception mentioned in the case. However, we were surprised to learn that quite a large number of public agencies still do not have a proper cafeteria plan document even though they maintain “cash-in-lieu” arrangements or benefit programs that operate as nontaxable cafeteria plans. In order to avoid the risk that the IRS might take the position that your cafeteria plan does not have the required “written plan” and that, as a result, your employees are taxable on the amounts that they could have received as wages (even if they selected nontaxable benefits), you should have a cafeteria plan document that satisfies the following requirements:

  1. A specific description of each of the benefits available through the plan;
  2. Rules on participation and requiring that all participants be employees;
  3. Procedures governing employees’ elections under the plan, including the period when elections may be made, the periods with respect to which elections are effective, and providing that elections are irrevocable, except to the extent that the optional change in status rules are included in the cafeteria plan;
  4. How employer contributions may be made under the plan;
  5. The maximum amount of employer contributions available to any employee through the plan, by stating the maximum amount of elective contributions available to any employee through the plan, expressed as a maximum dollar amount or a maximum percentage of compensation or the method for determining the maximum dollar amount;
  6. The plan year;
  7. If the plan offers paid time off, the required ordering rule for the use of nonelective and elective paid time off;
  8. If the plan includes flexible spending arrangements (FSAs), the plan’s provisions complying with any additional requirements for those FSAs;
  9. If the plan includes a grace period, the plan’s provisions complying with the grace period requirements; and
  10. If the plan includes distributions from a health FSA to employees’ HSAs, the plan’s provisions complying with the applicable requirements.
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