26 U.S.C. § 125 — Cafeteria plans

Page 582 TITLE 26—INTERNAL REVENUE CODE [§ 124 (2) the normal living expenses which would have been incurred for himself and members of his household during such period. (Added Pub. L. 91–172, title IX, § 901(a), Dec. 30, 1969, 83 Stat. 709.) Editorial Notes PRIOR PROVISIONS A prior section 123 was renumbered section 140 of this title. Statutory Notes and Related Subsidiaries EFFECTIVE DATE Pub. L. 91–172, title IX, § 901(c), Dec. 30, 1969, 83 Stat. 709, provided that: ‘‘The amendments made by this sec- tion [enacting this section] shall apply with respect to amounts received on or after January 1, 1969.’’ [§ 124. Repealed. Pub. L. 101–508, title XI, § 11801(a)(9), Nov. 5, 1990, 104 Stat. 1388–520] Section, added Pub. L. 95–618, title II, § 242(a), Nov. 9, 1978, 92 Stat. 3193, related to qualified transportation provided by employers. A prior section 124 was renumbered section 140 of this title. Statutory Notes and Related Subsidiaries SAVINGS PROVISION For provisions that nothing in repeal by Pub. L. 101–508 be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to Nov. 5, 1990, for purposes of determining liabil- ity for tax for periods ending after Nov. 5, 1990, see sec- tion 11821(b) of Pub. L. 101–508, set out as a note under section 45K of this title. § 125. Cafeteria plans (a) General rule Except as provided in subsection (b), no amount shall be included in the gross income of a participant in a cafeteria plan solely because, under the plan, the participant may choose among the benefits of the plan. (b) Exception for highly compensated partici- pants and key employees (1) Highly compensated participants In the case of a highly compensated partici- pant, subsection (a) shall not apply to any benefit attributable to a plan year for which the plan discriminates in favor of— (A) highly compensated individuals as to eligibility to participate, or (B) highly compensated participants as to contributions and benefits. (2) Key employees In the case of a key employee (within the meaning of section 416(i)(1)), subsection (a) shall not apply to any benefit attributable to a plan for which the qualified benefits pro- vided to key employees exceed 25 percent of the aggregate of such benefits provided for all employees under the plan. For purposes of the preceding sentence, qualified benefits shall be determined without regard to the second sen- tence of subsection (f). (3) Year of inclusion For purposes of determining the taxable year of inclusion, any benefit described in paragraph (1) or (2) shall be treated as received or accrued in the taxable year of the partici- pant or key employee in which the plan year ends. (c) Discrimination as to benefits or contributions For purposes of subparagraph (B) of subsection (b)(1), a cafeteria plan does not discriminate where qualified benefits and total benefits (or employer contributions allocable to qualified benefits and employer contributions for total benefits) do not discriminate in favor of highly compensated participants. (d) Cafeteria plan defined For purposes of this section— (1) In general The term ‘‘cafeteria plan’’ means a written plan under which— (A) all participants are employees, and (B) the participants may choose among 2 or more benefits consisting of cash and qualified benefits. (2) Deferred compensation plans excluded (A) In general The term ‘‘cafeteria plan’’ does not include any plan which provides for deferred com- pensation. (B) Exception for cash and deferred arrange- ments Subparagraph (A) shall not apply to a prof- it-sharing or stock bonus plan or rural coop- erative plan (within the meaning of section 401(k)(7)) which includes a qualified cash or deferred arrangement (as defined in section 401(k)(2)) to the extent of amounts which a covered employee may elect to have the em- ployer pay as contributions to a trust under such plan on behalf of the employee. (C) Exception for certain plans maintained by educational institutions Subparagraph (A) shall not apply to a plan maintained by an educational organization described in section 170(b)(1)(A)(ii) to the ex- tent of amounts which a covered employee may elect to have the employer pay as con- tributions for post-retirement group life in- surance if— (i) all contributions for such insurance must be made before retirement, and (ii) such life insurance does not have a cash surrender value at any time. For purposes of section 79, any life insurance described in the preceding sentence shall be treated as group-term life insurance. (D) Exception for health savings accounts Subparagraph (A) shall not apply to a plan to the extent of amounts which a covered employee may elect to have the employer pay as contributions to a health savings ac- count established on behalf of the employee. (e) Highly compensated participant and indi- vidual defined For purposes of this section— (1) Highly compensated participant The term ‘‘highly compensated participant’’ means a participant who is— Page 583 TITLE 26—INTERNAL REVENUE CODE § 125 (A) an officer, (B) a shareholder owning more than 5 per- cent of the voting power or value of all classes of stock of the employer, (C) highly compensated, or (D) a spouse or dependent (within the meaning of section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof) of an individual described in subparagraph (A), (B), or (C). (2) Highly compensated individual The term ‘‘highly compensated individual’’ means an individual who is described in sub- paragraph (A), (B), (C), or (D) of paragraph (1). (f) Qualified benefits defined For purposes of this section— (1) In general The term ‘‘qualified benefit’’ means any ben- efit which, with the application of subsection (a), is not includible in the gross income of the employee by reason of an express provision of this chapter (other than section 106(b), 117, 127, or 132). Such term includes any group term life insurance which is includible in gross income only because it exceeds the dollar limitation of section 79 and such term includes any other benefit permitted under regulations. (2) Long-term care insurance not qualified The term ‘‘qualified benefit’’ shall not in- clude any product which is advertised, mar- keted, or offered as long-term care insurance. (3) Certain exchange-participating qualified health plans not qualified (A) In general The term ‘‘qualified benefit’’ shall not in- clude any qualified health plan (as defined in section 1301(a) of the Patient Protection and Affordable Care Act) offered through an Ex- change established under section 1311 of such Act. (B) Exception for exchange-eligible employ- ers Subparagraph (A) shall not apply with re- spect to any employee if such employee’s employer is a qualified employer (as defined in section 1312(f)(2) of the Patient Protection and Affordable Care Act) offering the em- ployee the opportunity to enroll through such an Exchange in a qualified health plan in a group market. (g) Special rules (1) Collectively bargained plan not considered discriminatory For purposes of this section, a plan shall not be treated as discriminatory if the plan is maintained under an agreement which the Secretary finds to be a collective bargaining agreement between employee representatives and one or more employers. (2) Health benefits For purposes of subparagraph (B) of sub- section (b)(1), a cafeteria plan which provides health benefits shall not be treated as dis- criminatory if— (A) contributions under the plan on behalf of each participant include an amount which— (i) equals 100 percent of the cost of the health benefit coverage under the plan of the majority of the highly compensated participants similarly situated, or (ii) equals or exceeds 75 percent of the cost of the health benefit coverage of the participant (similarly situated) having the highest cost health benefit coverage under the plan, and (B) contributions or benefits under the plan in excess of those described in subpara- graph (A) bear a uniform relationship to compensation. (3) Certain participation eligibility rules not treated as discriminatory For purposes of subparagraph (A) of sub- section (b)(1), a classification shall not be treated as discriminatory if the plan— (A) benefits a group of employees described in section 410(b)(2)(A)(i), and (B) meets the requirements of clauses (i) and (ii): (i) No employee is required to complete more than 3 years of employment with the employer or employers maintaining the plan as a condition of participation in the plan, and the employment requirement for each employee is the same. (ii) Any employee who has satisfied the employment requirement of clause (i) and who is otherwise entitled to participate in the plan commences participation no later than the first day of the first plan year be- ginning after the date the employment re- quirement was satisfied unless the em- ployee was separated from service before the first day of that plan year. (4) Certain controlled groups, etc. All employees who are treated as employed by a single employer under subsection (b), (c), or (m) of section 414 shall be treated as em- ployed by a single employer for purposes of this section. (h) Special rule for unused benefits in health flexible spending arrangements of individ- uals called to active duty (1) In general For purposes of this title, a plan or other ar- rangement shall not fail to be treated as a caf- eteria plan or health flexible spending ar- rangement (and shall not fail to be treated as an accident or health plan) merely because such arrangement provides for qualified re- servist distributions. (2) Qualified reservist distribution For purposes of this subsection, the term ‘‘qualified reservist distribution’’ means any distribution to an individual of all or a portion of the balance in the employee’s account under such arrangement if— (A) such individual was (by reason of being a member of a reserve component (as defined in section 101 of title 37, United States Code)) ordered or called to active duty for a period in excess of 179 days or for an indefi- nite period, and (B) such distribution is made during the period beginning on the date of such order or Page 584 TITLE 26—INTERNAL REVENUE CODE § 125 call and ending on the last date that reim- bursements could otherwise be made under such arrangement for the plan year which includes the date of such order or call. (i) Limitation on health flexible spending ar- rangements (1) In general For purposes of this section, if a benefit is provided under a cafeteria plan through em- ployer contributions to a health flexible spending arrangement, such benefit shall not be treated as a qualified benefit unless the caf- eteria plan provides that an employee may not elect for any taxable year to have salary re- duction contributions in excess of $2,500 made to such arrangement. (2) Adjustment for inflation In the case of any taxable year beginning after December 31, 2013, the dollar amount in paragraph (1) shall be increased by an amount equal to— (A) such amount, multiplied by (B) the cost-of-living adjustment deter- mined under section 1(f)(3) for the calendar year in which such taxable year begins by substituting ‘‘calendar year 2012’’ for ‘‘cal- endar year 2016’’ in subparagraph (A)(ii) thereof. If any increase determined under this para- graph is not a multiple of $50, such increase shall be rounded to the next lowest multiple of $50. (j) Simple cafeteria plans for small businesses (1) In general An eligible employer maintaining a simple cafeteria plan with respect to which the re- quirements of this subsection are met for any year shall be treated as meeting any applica- ble nondiscrimination requirement during such year. (2) Simple cafeteria plan For purposes of this subsection, the term ‘‘simple cafeteria plan’’ means a cafeteria plan— (A) which is established and maintained by an eligible employer, and (B) with respect to which the contribution requirements of paragraph (3), and the eligi- bility and participation requirements of paragraph (4), are met. (3) Contribution requirements (A) In general The requirements of this paragraph are met if, under the plan the employer is re- quired, without regard to whether a quali- fied employee makes any salary reduction contribution, to make a contribution to pro- vide qualified benefits under the plan on be- half of each qualified employee in an amount equal to— (i) a uniform percentage (not less than 2 percent) of the employee’s compensation for the plan year, or (ii) an amount which is not less than the lesser of— (I) 6 percent of the employee’s com- pensation for the plan year, or (II) twice the amount of the salary re- duction contributions of each qualified employee. (B) Matching contributions on behalf of high- ly compensated and key employees The requirements of subparagraph (A)(ii) shall not be treated as met if, under the plan, the rate of contributions with respect to any salary reduction contribution of a highly compensated or key employee at any rate of contribution is greater than that with respect to an employee who is not a highly compensated or key employee. (C) Additional contributions Subject to subparagraph (B), nothing in this paragraph shall be treated as prohib- iting an employer from making contribu- tions to provide qualified benefits under the plan in addition to contributions required under subparagraph (A). (D) Definitions For purposes of this paragraph— (i) Salary reduction contribution The term ‘‘salary reduction contribu- tion’’ means, with respect to a cafeteria plan, any amount which is contributed to the plan at the election of the employee and which is not includible in gross in- come by reason of this section. (ii) Qualified employee The term ‘‘qualified employee’’ means, with respect to a cafeteria plan, any em- ployee who is not a highly compensated or key employee and who is eligible to par- ticipate in the plan. (iii) Highly compensated employee The term ‘‘highly compensated em- ployee’’ has the meaning given such term by section 414(q). (iv) Key employee The term ‘‘key employee’’ has the mean- ing given such term by section 416(i). (4) Minimum eligibility and participation re- quirements (A) In general The requirements of this paragraph shall be treated as met with respect to any year if, under the plan— (i) all employees who had at least 1,000 hours of service for the preceding plan year are eligible to participate, and (ii) each employee eligible to participate in the plan may, subject to terms and con- ditions applicable to all participants, elect any benefit available under the plan. (B) Certain employees may be excluded For purposes of subparagraph (A)(i), an employer may elect to exclude under the plan employees— (i) who have not attained the age of 21 before the close of a plan year, (ii) who have less than 1 year of service with the employer as of any day during the plan year, (iii) who are covered under an agreement which the Secretary of Labor finds to be a Page 585 TITLE 26—INTERNAL REVENUE CODE § 125 collective bargaining agreement if there is evidence that the benefits covered under the cafeteria plan were the subject of good faith bargaining between employee rep- resentatives and the employer, or (iv) who are described in section 410(b)(3)(C) (relating to nonresident aliens working outside the United States). A plan may provide a shorter period of serv- ice or younger age for purposes of clause (i) or (ii). (5) Eligible employer For purposes of this subsection— (A) In general The term ‘‘eligible employer’’ means, with respect to any year, any employer if such employer employed an average of 100 or fewer employees on business days during ei- ther of the 2 preceding years. For purposes of this subparagraph, a year may only be taken into account if the employer was in exist- ence throughout the year. (B) Employers not in existence during pre- ceding year If an employer was not in existence throughout the preceding year, the deter- mination under subparagraph (A) shall be based on the average number of employees that it is reasonably expected such employer will employ on business days in the current year. (C) Growing employers retain treatment as small employer (i) In general If— (I) an employer was an eligible em- ployer for any year (a ‘‘qualified year’’), and (II) such employer establishes a simple cafeteria plan for its employees for such year, then, notwithstanding the fact the em- ployer fails to meet the requirements of subparagraph (A) for any subsequent year, such employer shall be treated as an eligi- ble employer for such subsequent year with respect to employees (whether or not employees during a qualified year) of any trade or business which was covered by the plan during any qualified year. (ii) Exception This subparagraph shall cease to apply if the employer employs an average of 200 or more employees on business days during any year preceding any such subsequent year. (D) Special rules (i) Predecessors Any reference in this paragraph to an employer shall include a reference to any predecessor of such employer. (ii) Aggregation rules All persons treated as a single employer under subsection (a) or (b) of section 52, or subsection (n) or (o) of section 414, shall be treated as one person. (6) Applicable nondiscrimination requirement For purposes of this subsection, the term ‘‘applicable nondiscrimination requirement’’ means any requirement under subsection (b) of this section, section 79(d), section 105(h), or paragraph (2), (3), (4), or (8) of section 129(d). (7) Compensation The term ‘‘compensation’’ has the meaning given such term by section 414(s). (k) Cross reference For reporting and recordkeeping requirements, see section 6039D. (l) Regulations The Secretary shall prescribe such regulations as may be necessary to carry out the provisions of this section. (Added Pub. L. 95–600, title I, § 134(a), Nov. 6, 1978, 92 Stat. 2783; amended Pub. L. 96–222, title I, § 101(a)(6)(A), Apr. 1, 1980, 94 Stat. 196; Pub. L. 96–605, title II, §§ 201(b)(2), 226(a), Dec. 28, 1980, 94 Stat. 3527, 3529; Pub. L. 96–613, § 5(b)(2), Dec. 28, 1980, 94 Stat. 3581; Pub. L. 98–369, div. A, title V, § 531(b)(1)–(4)(A), July 18, 1984, 98 Stat. 881, 882; Pub. L. 98–611, § 1(d)(3)(A), Oct. 31, 1984, 98 Stat. 3177; Pub. L. 98–612, § 1(b)(3)(B), Oct. 31, 1984, 98 Stat. 3181; Pub. L. 99–514, title XI, § 1151(d)(1), title XVIII, § 1853(b)(1), Oct. 22, 1986, 100 Stat. 2504, 2870; Pub. L. 100–647, title I, §§ 1011B(a)(11)–(13), 1018(t)(6), title IV, § 4002(b)(2), title VI, § 6051(b), Nov. 10, 1988, 102 Stat. 3484, 3485, 3589, 3643, 3696; Pub. L. 101–140, title II, § 203(a)(1), (3), (b)(2), Nov. 8, 1989, 103 Stat. 830, 831; Pub. L. 101–239, title VII, § 7814(b), Dec. 19, 1989, 103 Stat. 2413; Pub. L. 101–508, title XI, § 11801(c)(3), Nov. 5, 1990, 104 Stat. 1388–523; Pub. L. 104–191, title III, §§ 301(d), 321(c)(1), Aug. 21, 1996, 110 Stat. 2051, 2058; Pub. L. 108–173, title XII, § 1201(i), Dec. 8, 2003, 117 Stat. 2479; Pub. L. 108–311, title II, § 207(11), Oct. 4, 2004, 118 Stat. 1177; Pub. L. 110–172, § 11(a)(12), Dec. 29, 2007, 121 Stat. 2485; Pub. L. 110–245, title I, § 114(a), June 17, 2008, 122 Stat. 1636; Pub. L. 111–148, title I, § 1515(a), (b), title IX, §§ 9005(a), 9022(a), title X, § 10902(a), Mar. 23, 2010, 124 Stat. 258, 854, 874, 1016; Pub. L. 111–152, title I, § 1403(b), Mar. 30, 2010, 124 Stat. 1063; Pub. L. 113–295, div. A, title II, §§ 213(b), 220(f), (g), Dec. 19, 2014, 128 Stat. 4033, 4036; Pub. L. 115–97, title I, § 11002(d)(1)(L), Dec. 22, 2017, 131 Stat. 2060; Pub. L. 115–141, div. U, title IV, § 401(a)(37), Mar. 23, 2018, 132 Stat. 1186.) INFLATION ADJUSTED ITEMS FOR CERTAIN YEARS For inflation adjustment of certain items in this section, see Revenue Procedures listed in a table under section 1 of this title. Editorial Notes REFERENCES IN TEXT Sections 1301, 1311, and 1312 of the Patient Protection and Affordable Care Act, referred to in subsec. (f)(3), are classified to sections 18021, 18031, and 18032, respec- tively, of Title 42, The Public Health and Welfare. CODIFICATION Pub. L. 101–140, § 203(a)(1), amended this section to read as if the amendments made by section 1151(d)(1) of Pub. L. 99–514 (amending this section generally) had not been enacted. Subsequent to amendment by Pub. L. Page 586 TITLE 26—INTERNAL REVENUE CODE § 125 99–514, this section was amended by Pub. L. 100–647 and Pub. L. 101–239. See 1989 and 1988 Amendment notes below. PRIOR PROVISIONS A prior section 125 was renumbered section 140 of this title. AMENDMENTS 2018—Subsec. (e)(2). Pub. L. 115–141 substituted ‘‘sub- paragraph’’ for ‘‘subparagraphs’’. 2017—Subsec. (i)(2)(B). Pub. L. 115–97 substituted ‘‘for ‘calendar year 2016’ in subparagraph (A)(ii)’’ for ‘‘for ‘calendar year 1992’ in subparagraph (B)’’. 2014—Subsec. (b)(2). Pub. L. 113–295, § 220(f), sub- stituted ‘‘qualified benefits’’ for ‘‘statutory nontaxable benefits’’ in two places. Subsec. (h)(1). Pub. L. 113–295, § 213(b), inserted ‘‘(and shall not fail to be treated as an accident or health plan)’’ before ‘‘merely’’. Subsec. (h)(2). Pub. L. 113–295, § 220(g), substituted ‘‘means any’’ for ‘‘means, any’’ in introductory provi- sions. 2010—Subsec. (f). Pub. L. 111–148, § 1515(a), (b), sub- stituted ‘‘For purposes of this section—’’ for ‘‘For pur- poses of this section,’’; designated remainder of first sentence and second sentence as par. (1), inserted head- ing, and substituted ‘‘The term’’ for ‘‘the term’’; des- ignated third sentence as par. (2), inserted heading, and substituted ‘‘The term ‘qualified benefit’ shall not in- clude’’ for ‘‘Such term shall not include’’; and added par. (3). Subsec. (i). Pub. L. 111–148, § 10902(a), amended subsec. (i) generally. Prior to amendment, text read as follows: ‘‘For purposes of this section, if a benefit is provided under a cafeteria plan through employer contributions to a health flexible spending arrangement, such benefit shall not be treated as a qualified benefit unless the cafeteria plan provides that an employee may not elect for any taxable year to have salary reduction contribu- tions in excess of $2,500 made to such arrangement.’’ Pub. L. 111–148, § 9005(a)(2), added subsec. (i). Former subsec. (i) redesignated (j). Subsec. (i)(2). Pub. L. 111–152, § 1403(b)(1), substituted ‘‘December 31, 2013’’ for ‘‘December 31, 2011’’ in intro- ductory provisions. Subsec. (i)(2)(B). Pub. L. 111–152, § 1403(b)(2), sub- stituted ‘‘2012’’ for ‘‘2010’’. Subsec. (j). Pub. L. 111–148, § 9022(a), added subsec. (j). Former subsec. (j) redesignated (k). Pub. L. 111–148, § 9005(a)(1), redesignated subsec. (j) as (k). Subsec. (k). Pub. L. 111–148, § 9022(a), redesignated subsec. (j) as (k). Former subsec. (k) redesignated (l). Pub. L. 111–148, § 9005(a)(1), redesignated subsec. (j) as (k). Subsec. (l). Pub. L. 111–148, § 9022(a), redesignated sub- sec. (k) as (l). 2008—Subsecs. (h) to (j). Pub. L. 110–245 added subsec. (h) and redesignated former subsecs. (h) and (i) as (i) and (j), respectively. 2007—Subsec. (b)(2). Pub. L. 110–172 substituted ‘‘sec- ond sentence’’ for ‘‘last sentence’’. 2004—Subsec. (e)(1)(D). Pub. L. 108–311 inserted ‘‘, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof’’ after ‘‘section 152’’. 2003—Subsec. (d)(2)(D). Pub. L. 108–173, which directed the amendment of section 125(d)(2) by adding subpar. (D), was executed to this section, which is section 125(d)(2) of the Internal Revenue Code of 1986, to reflect the probable intent of Congress. 1996—Subsec. (f). Pub. L. 104–191, § 321(c)(1), inserted at end ‘‘Such term shall not include any product which is advertised, marketed, or offered as long-term care insurance.’’ Pub. L. 104–191, § 301(d), inserted ‘‘106(b),’’ before ‘‘117’’. 1990—Subsec. (f). Pub. L. 101–508 substituted ‘‘section 117,’’ for ‘‘section 117, 124,’’. 1989—Pub. L. 101–140, § 203(a)(1), amended section to read as if amendments by Pub. L. 99–514, § 1151(d)(1), had not been enacted, see 1986 Amendment note below. Subsec. (d)(2). Pub. L. 101–140, § 203(b)(2), amended par. (2) generally. Prior to amendment, par. (2) read as fol- lows: ‘‘The term ‘cafeteria plan’ does not include any plan which provides for deferred compensation. The preceding sentence shall not apply in the case of a prof- it-sharing or stock bonus plan which includes a quali- fied cash or deferred arrangement (as defined in section 401(k)(2)) to the extent of amounts which a covered em- ployee may elect to have the employer pay as contribu- tions to a trust under such plan on behalf of the em- ployee.’’ Subsec. (e)(2)(A). Pub. L. 101–239 substituted ‘‘includ- ible only because’’ for ‘‘includable only because’’, see Codification note above. Subsec. (g)(3)(A). Pub. L. 101–140, § 203(a)(3), sub- stituted ‘‘section 410(b)(2)(A)(i)’’ for ‘‘subparagraph (B) of section 410(b)(1)’’. 1988—Subsec. (a). Pub. L. 100–647, § 1011B(a)(11)(A), amended subsec. (a) generally, see Codification note above. Prior to amendment, subsec. (a) read as follows: ‘‘In the case of a cafeteria plan— ‘‘(1) amounts shall not be included in gross income of a participant in such plan solely because, under the plan, the participant may choose among the bene- fits of the plan, and ‘‘(2) if the plan fails to meet the requirements of subsection (b) for any plan year— ‘‘(A) paragraph (1) shall not apply, and ‘‘(B) notwithstanding any other provision of part III of this subchapter, any qualified benefits re- ceived under such cafeteria plan by a highly com- pensated employee for such plan year shall be in- cluded in the gross income of such employee for the taxable year with or within which such plan year ends.’’ Subsec. (b)(1). Pub. L. 100–647, § 1011B(a)(11)(B), sub- stituted ‘‘In the case of a highly compensated em- ployee, subsection (a) shall not apply to any benefit at- tributable to a plan year’’ for ‘‘A plan shall be treated as failing to meet the requirements of this subsection’’, see Codification note above. Subsec. (b)(2). Pub. L. 100–647, § 1011B(a)(11)(C), sub- stituted ‘‘subsection (a) shall not apply to any plan year’’ for ‘‘a plan shall be treated as failing to meet the requirements of this subsection’’ in first sentence, see Codification note above. Pub. L. 100–647, § 1011B(a)(13)(B), substituted ‘‘shall not include benefits which (without regard to this para- graph) are includible in gross income’’ for ‘‘shall be de- termined without regard to the last sentence of sub- section (e)’’, see Codification note above. Subsec. (c)(1)(B). Pub. L. 100–647, § 1011B(a)(12), amended subpar. (B) generally, see Codification note above. Prior to amendment, subpar. (B) read as follows: ‘‘the participants may choose— ‘‘(i) among 2 or more benefits consisting of cash and qualified benefits, or ‘‘(ii) among 2 or more qualified benefits.’’ Subsec. (c)(2)(B). Pub. L. 100–647, § 1018(t)(6), inserted ‘‘or rural electric cooperative plan (within the meaning of section 401(k)(7))’’ after ‘‘stock bonus plan’’, see Codification note above. Subsec. (c)(2)(C). Pub. L. 100–647, § 6051(b), inserted at end ‘‘In applying section 89 to a plan described in this subparagraph, contributions under the plan shall be tested as of the time the contributions were made.’’, see Codification note above. Subsec. (e)(1). Pub. L. 100–647, § 1011B(a)(13)(A), in- serted ‘‘and without regard to section 89(a)’’ after ‘‘sub- section (a)’’, see Codification note above. Subsec. (e)(2)(A). Pub. L. 100–647, § 4002(b)(2), inserted ‘‘or any insurance under a qualified group legal services plan the value of which is so includable only because it exceeds the limitation of section 120(a)’’ after ‘‘section 79’’, see Codification note above. 1986—Pub. L. 99–514, § 1151(d)(1), amended section gen- erally, revising and restating as subsecs. (a) to (g) pro- Page 587 TITLE 26—INTERNAL REVENUE CODE § 125 visions of former subsecs. (a) to (i) so as to coincide with the coming into effect of section 89 of this title. Subsecs. (c), (d)(1)(B). Pub. L. 99–514, § 1853(b)(1)(A), substituted ‘‘qualified benefits’’ for ‘‘statutory non- taxable benefits’’ wherever appearing. Subsec. (f). Pub. L. 99–514, § 1853(b)(1)(B), substituted ‘‘Qualified benefits defined’’ for ‘‘Statutory nontaxable benefits defined’’ in heading and amended text gen- erally. Prior to amendment, text read as follows: ‘‘For purposes of this section, the term ‘statutory non- taxable benefit’ means any benefit which, with the ap- plication of subsection (a) is not includible in the gross income of the employee by reason of an express provi- sion of this chapter (other than section 117, 124, 127, or 132). Such term includes any group term life insurance which is includible in gross income only because it ex- ceeds the dollar limitation of section 79.’’ 1984—Subsec. (b). Pub. L. 98–369, § 531(b)(3), amended subsec. (b) generally, substituting ‘‘and key employ- ees’’ for ‘‘where plan is discriminatory’’ in heading and ‘‘Highly compensated participants’’ for ‘‘In general’’ in par. (1) heading, adding par. (2), redesignating former par. (2) as (3), and inserting therein references to par. (2) and to taxable year of key employee. Subsec. (c). Pub. L. 98–369, § 531(b)(2)(B), inserted ‘‘statutory’’ before ‘‘nontaxable benefits’’ in two places. Subsec. (d)(1). Pub. L. 98–369, § 531(b)(1), substituted ‘‘among 2 or more benefits consisting of cash and statu- tory nontaxable benefits’’ for ‘‘among two or more ben- efits’’ in cl. (B) and struck out ‘‘The benefits which may be chosen may be nontaxable benefits, or cash, property, or other taxable benefits.’’ Subsec. (f). Pub. L. 98–369, § 531(b)(2)(A), amended sub- sec. (f) generally, inserting ‘‘Statutory’’ in heading and ‘‘statutory’’ before ‘‘nontaxable benefit’’ in text, pro- viding that the benefit be excluded by reason of an ex- press provision of this chapter (other than section 117, 124, 127, or 132), and extending the benefit to include group term life insurance. Subsec. (h). Pub. L. 98–611 and Pub. L. 98–612, made identical amendments, substituting cross reference provision for reporting requirements provisions. Pub. L. 98–369, § 531(b)(4)(A), added subsec. (h) relating to reporting requirements provisions. Former subsec. (h) redesignated (i). Subsec. (i). Pub. L. 98–369, § 531(b)(4)(A), redesignated subsec. (h) as (i). 1980—Subsec. (d)(2). Pub. L. 96–605, § 226(a), inserted provision that the sentence excluding deferred com- pensation plans not apply in the case of a profit-shar- ing or stock bonus plan which includes a qualified cash or deferred arrangement, as defined in section 401(k)(2) to the extent of amounts which a covered employee may elect to have the employer pay as contributions to a trust under such plan on behalf of the employee. Subsec. (g)(3)(B). Pub. L. 96–222 substituted ‘‘employ- ment requirement’’ for ‘‘service requirement’’ in cls. (i) and (ii). Subsec. (g)(4). Pub. L. 96–613, § 5(b)(2), and Pub. L. 96–605, § 201(b)(2), made identical amendments by sub- stituting ‘‘controlled groups, etc.’’ for ‘‘controlled groups’’ in heading, and by substituting ‘‘subsection (b), (c), or (m) of section 414’’ for ‘‘subsection (b) or (c) of section 414’’ in text. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2017 AMENDMENT Amendment by Pub. L. 115–97 applicable to taxable years beginning after Dec. 31, 2017, see section 11002(e) of Pub. L. 115–97, set out as a note under section 1 of this title. EFFECTIVE DATE OF 2014 AMENDMENT Amendment by section 213(b) of Pub. L. 113–295 effec- tive as if included in the provisions of the Heroes Earn- ings Assistance and Relief Tax Act of 2008, Pub. L. 110–245, to which such amendment relates, see section 213(d) of Pub. L. 113–295, set out as a note under section 121 of this title. EFFECTIVE DATE OF 2010 AMENDMENT Pub. L. 111–148, title I, § 1515(c), Mar. 23, 2010, 124 Stat. 258, provided that: ‘‘The amendments made by this sec- tion [amending this section] shall apply to taxable years beginning after December 31, 2013.’’ Pub. L. 111–148, title IX, § 9005(b), Mar. 23, 2010, 124 Stat. 855, provided that: ‘‘The amendments made by this section [amending this section] shall apply to tax- able years beginning after December 31, 2010.’’ Pub. L. 111–148, title IX, § 9022(b), Mar. 23, 2010, 124 Stat. 876, provided that: ‘‘The amendments made by this section [amending this section] shall apply to years beginning after December 31, 2010.’’ Pub. L. 111–148, title X, § 10902(b), Mar. 23, 2010, 124 Stat. 1016, as amended by Pub. L. 111–152, title I, § 1403(a), Mar. 30, 2010, 124 Stat. 1063, provided that: ‘‘The amendment made by this section [amending this section] shall apply to taxable years beginning after December 31, 2012.’’ EFFECTIVE DATE OF 2008 AMENDMENT Pub. L. 110–245, title I, § 114(b), June 17, 2008, 122 Stat. 1636, provided that: ‘‘The amendment made by this sec- tion [amending this section] shall apply to distribu- tions made after the date of the enactment of this Act [June 17, 2008].’’ EFFECTIVE DATE OF 2004 AMENDMENT Amendment by Pub. L. 108–311 applicable to taxable years beginning after Dec. 31, 2004, see section 208 of Pub. L. 108–311, set out as a note under section 2 of this title. EFFECTIVE DATE OF 2003 AMENDMENT Amendment by Pub. L. 108–173 applicable to taxable years beginning after Dec. 31, 2003, see section 1201(k) of Pub. L. 108–173, set out as a note under section 62 of this title. EFFECTIVE DATE OF 1996 AMENDMENT Amendment by section 301(d) of Pub. L. 104–191 appli- cable to taxable years beginning after Dec. 31, 1996, see section 301(j) of Pub. L. 104–191, set out as a note under section 62 of this title. Amendment by section 321(c)(1) of Pub. L. 104–191 ap- plicable to contracts issued after Dec. 31, 1996, see sec- tion 321(f) of Pub. L. 104–191, set out as an Effective Date note under section 7702B of this title. EFFECTIVE DATE OF 1989 AMENDMENTS Amendment by Pub. L. 101–239 effective, except as otherwise provided, as if included in the provision of the Technical and Miscellaneous Revenue Act of 1988, Pub. L. 100–647, to which such amendment relates, see section 7817 of Pub. L. 101–239, set out as a note under section 1 of this title. Amendment by Pub. L. 101–140 effective as if included in section 1151 of Pub. L. 99–514, see section 203(c) of Pub. L. 101–140, set out as a note under section 79 of this title. EFFECTIVE DATE OF 1988 AMENDMENT Amendment by sections 1011B(a)(11)–(13) and 1018(t)(6) of Pub. L. 100–647 effective, except as otherwise pro- vided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title. Pub. L. 100–647, title IV, § 4002(c), Nov. 10, 1988, 102 Stat. 3643, provided that: ‘‘The amendments made by this section [amending this section and section 120 of this title] shall apply to taxable years ending after De- cember 31, 1987.’’ Pub. L. 100–647, title VI, § 6051(c), Nov. 10, 1988, 102 Stat. 3696, provided that: ‘‘The amendments made by Page 588 TITLE 26—INTERNAL REVENUE CODE § 125 this section [amending this section and section 89 of this title] shall take effect as if included in the amend- ments made by section 1151 of the Reform Act [Pub. L. 99–514, see Effective Date of 1986 Amendment note set out under section 79 of this title].’’ EFFECTIVE DATE OF 1986 AMENDMENT Amendment by section 1151(d)(1) of Pub. L. 99–514 ap- plicable, with certain qualifications and exceptions, to years beginning after Dec. 31, 1988, see section 1151(k) of Pub. L. 99–514, as amended, set out as a note under sec- tion 79 of this title. Amendment by section 1853(b)(1) of Pub. L. 99–514 ef- fective, except as otherwise provided, as if included in the provisions of the Tax Reform Act of 1984, Pub. L. 98–369, div. A, to which such amendment relates, see section 1881 of Pub. L. 99–514, set out as a note under section 48 of this title. EFFECTIVE DATE OF 1984 AMENDMENT Amendment by Pub. L. 98–612 effective Jan. 1, 1985, see Pub. L. 98–612, § 1(d)(2), Oct. 31, 1984, 98 Stat. 3181. Amendment by Pub. L. 98–611 effective Jan. 1, 1985, see section 1(g)(2) of Pub. L. 98–611, set out as a note under section 127 of this title. Amendment by Pub. L. 98–369 effective Jan. 1, 1985, see section 531(h) of Pub. L. 98–369, set out as an Effec- tive Date note under section 132 of this title. EFFECTIVE DATE OF 1980 AMENDMENT Amendments by section 201(b)(2) of Pub. L. 96–605 and section 5(b)(2) of Pub. L. 96–613 applicable to years end- ing after Nov. 30, 1980, except in the case of a plan in existence on Nov. 30, 1980 where amendments by section 201(b)(2) of Pub. L. 96–605 and section 5(b)(2) of Pub. L. 96–613 applicable to plan years beginning after Nov. 30, 1980, see section 201(c) of Pub. L. 96–605 and section 5(c) of Pub. L. 96–613, set out as a note under section 414 of this title. Pub. L. 96–605, title II, § 226(b), Dec. 28, 1980, 94 Stat. 3530, provided that: ‘‘The amendment made by sub- section (a) [amending this section] shall apply with re- spect to taxable years beginning after December 31, 1980.’’ Amendment by Pub. L. 96–222 effective, except as oth- erwise provided, as if it had been included in the provi- sions of the Revenue Act of 1978, Pub. L. 95–600, to which such amendment relates, see section 201 of Pub. L. 96–222, set out as a note under section 32 of this title. EFFECTIVE DATE OF 1978 AMENDMENT Pub. L. 95–600, title I, § 134(c), Nov. 6, 1978, 92 Stat. 2785, as amended by Pub. L. 96–222, title I, § 101(a)(6)(B), Apr. 1, 1980, 94 Stat. 197, provided that: ‘‘The amend- ments made by this section [enacting this section] shall apply to plan years beginning after December 31, 1978.’’ SAVINGS PROVISION For provisions that nothing in amendment by Pub. L. 101–508 be construed to affect treatment of certain transactions occurring, property acquired, or items of income, loss, deduction, or credit taken into account prior to Nov. 5, 1990, for purposes of determining liabil- ity for tax for periods ending after Nov. 5, 1990, see sec- tion 11821(b) of Pub. L. 101–508, set out as a note under section 45K of this title. TEMPORARY SPECIAL RULES FOR HEALTH AND DEPENDENT CARE FLEXIBLE SPENDING ARRANGEMENTS Pub. L. 116–260, div. EE, title II, § 214, Dec. 27, 2020, 134 Stat. 3068, provided that: ‘‘(a) CARRYOVER FROM 2020 PLAN YEAR.—For plan years ending in 2020, a plan that includes a health flexi- ble spending arrangement or dependent care flexible spending arrangement shall not fail to be treated as a cafeteria plan under the Internal Revenue Code of 1986 merely because such plan or arrangement permits par- ticipants to carry over (under rules similar to the rules applicable to health flexible spending arrangements) any unused benefits or contributions remaining in any such flexible spending arrangement from such plan year to the plan year ending in 2021. ‘‘(b) CARRYOVER FROM 2021 PLAN YEAR.—For plan years ending in 2021, a plan that includes a health flexi- ble spending arrangement or dependent care flexible spending arrangement shall not fail to be treated as a cafeteria plan under the Internal Revenue Code of 1986 merely because such plan or arrangement permits par- ticipants to carry over (under rules similar to the rules applicable to health flexible spending arrangements) any unused benefits or contributions remaining in any such flexible spending arrangement from such plan year to the plan year ending in 2022. ‘‘(c) EXTENSION OF GRACE PERIODS, ETC.— ‘‘(1) IN GENERAL.—A plan that includes a health flexible spending arrangement or dependent care flexible spending arrangement shall not fail to be treated as a cafeteria plan under the Internal Rev- enue Code of 1986 merely because such plan or ar- rangement extends the grace period for a plan year ending in 2020 or 2021 to 12 months after the end of such plan year, with respect to unused benefits or contributions remaining in a health flexible spending arrangement or a dependent care flexible spending ar- rangement. ‘‘(2) POST-TERMINATION REIMBURSEMENTS FROM HEALTH FSAS.—A plan that includes a health flexible spending arrangement shall not fail to be treated as a cafeteria plan under the Internal Revenue Code of 1986 merely because such plan or arrangement allows (under rules similar to the rules applicable to depend- ent care flexible spending arrangements) an employee who ceases participation in the plan during calendar year 2020 or 2021 to continue to receive reimburse- ments from unused benefits or contributions through the end of the plan year in which such participation ceased (including any grace period, taking into ac- count any modification of a grace period permitted under paragraph (1)). ‘‘(d) SPECIAL CARRY FORWARD RULE FOR DEPENDENT CARE FLEXIBLE SPENDING ARRANGEMENTS WHERE DE- PENDENT AGED OUT DURING PANDEMIC.— ‘‘(1) IN GENERAL.—In the case of any eligible em- ployee, section 21(b)(1)(A) of the Internal Revenue Code of 1986 shall be applied by substituting ‘age 14’ for ‘age 13’ for purposes of determining the dependent care assistance which may be paid or reimbursed with respect to such employee under the dependent care flexible spending arrangement referred to in para- graph (3)(A) with respect to such employee during— ‘‘(A) the plan year described in paragraph (3)(A), and ‘‘(B) in the case of an employee described in para- graph (3)(B)(ii), the subsequent plan year. ‘‘(2) APPLICATION TO SUBSEQUENT PLAN YEAR LIMITED TO UNUSED BALANCE FROM PRECEDING PLAN YEAR.— Paragraph (1)(B) shall only apply to so much of the amounts paid for dependent care assistance with re- spect to the dependents referred to in paragraph (3)(B) as does not exceed the unused balance described in paragraph (3)(B)(ii). ‘‘(3) ELIGIBLE EMPLOYEE.—For purposes of this sec- tion, the term ‘eligible employee’ means any em- ployee who— ‘‘(A) is enrolled in a dependent care flexible spending arrangement for the last plan year with respect to which the end of the regular enrollment period for such plan year was on or before January 31, 2020, and ‘‘(B) has one or more dependents (as defined in section 152(a)(1) of the Internal Revenue Code of 1986) who attain the age of 13— ‘‘(i) during such plan year, or ‘‘(ii) in the case of an employee who (after the application of this section) has an unused balance in the employee’s account under such arrange- ment for such plan year (determined as of the Page 589 TITLE 26—INTERNAL REVENUE CODE § 126 close of the last day on which, under the terms of the plan, claims for reimbursement may be made with respect to such plan year), the subsequent plan year. ‘‘(e) CHANGE IN ELECTION AMOUNT.—For plan years ending in 2021, a plan that includes a health flexible spending arrangement or dependent care flexible spend- ing arrangement shall not fail to be treated as a cafe- teria plan under the Internal Revenue Code of 1986 merely because such plan or arrangement allows an employee to make an election to modify prospectively the amount (but not in excess of any applicable dollar limitation) of such employee’s contributions to any such flexible spending arrangement (without regard to any change in status). ‘‘(f) DEFINITIONS.—Any term used in this section which is also used in section 106, 125, or 129 of the Inter- nal Revenue Code of 1986, or the regulations or guid- ance thereunder, shall have the same meaning as when used in such section, regulations, or guidance. ‘‘(g) PLAN AMENDMENTS.—A plan that includes a health flexible spending arrangement or dependent care flexible spending arrangement shall not fail to be treat- ed as a cafeteria plan under the Internal Revenue Code of 1986 merely because such plan or arrangement is amended pursuant to a provision under this section and such amendment is retroactive, if— ‘‘(1) such amendment is adopted not later than the last day of the first calendar year beginning after the end of the plan year in which the amendment is effec- tive, and ‘‘(2) the plan or arrangement is operated consistent with the terms of such amendment during the period beginning on the effective date of the amendment and ending on the date the amendment is adopted.’’ NONENFORCEMENT OF AMENDMENT MADE BY SECTION 1151 OF PUB. L. 99–514 FOR FISCAL YEAR 1990 No monies appropriated by Pub. L. 101–136 to be used to implement or enforce section 1151 of Pub. L. 99–514 or the amendments made by such section, see section 528 of Pub. L. 101–136, set out as a note under section 89 of this title. TREATMENT OF PRE-1989 ELECTIONS FOR DEPENDENT CARE ASSISTANCE UNDER CAFETERIA PLANS Pub. L. 100–647, title VI, § 6063, Nov. 10, 1988, 102 Stat. 3700, provided that: ‘‘For purposes of section 125 of the 1986 Code, a plan shall not be treated as failing to be a cafeteria plan solely because under the plan a partici- pant elected before January 1, 1989, to receive reim- bursement under the plan for dependent care assistance for periods after December 31, 1988, and such assistance is includible in gross income under the provisions of the Family Support Act of 1988 [Pub. L. 100–485, see Ta- bles for classification].’’ For provision that for purposes of section 125 of the Internal Revenue Code of 1986, a plan shall not be treat- ed as failing to be a cafeteria plan solely because under the plan a participant elected before January 1, 1988, to receive reimbursement under the plan for dependent care assistance for periods after December 31, 1987, and such assistance included reimbursement for expenses at a camp where the dependent stays overnight, see sec- tion 10101(b)(2) of Pub. L. 100–203, as added by Pub. L. 100–647, set out as an Effective Date of 1987 Amendment note under section 21 of this title. EXCEPTION FOR CERTAIN CAFETERIA PLANS AND BENEFITS Pub. L. 98–369, div. A, title V, § 531(b)(5), July 18, 1984, 98 Stat. 883, as amended by Pub. L. 99–514, title XVIII, § 1853(b)(2), (3), Oct. 22, 1986, 100 Stat. 2870, 2871, provided that: ‘‘(A) GENERAL TRANSITIONAL RULE.—Any cafeteria plan in existence on February 10, 1984, which failed as of such date and continued to fail thereafter to satisfy the rules relating to section 125 under proposed Treas- ury regulations, and any benefit offered under such a cafeteria plan which failed as of such date and contin- ued to fail thereafter to satisfy the rules of section 105, 106, 120, or 129 under proposed Treasury regulations, will not fail to be a cafeteria plan under section 125 or a nontaxable benefit under section 105, 106, 120, or 129 solely because of such failures. The preceding sentence shall apply only with respect to cafeteria plans and benefits provided under cafeteria plans before the ear- lier of— ‘‘(i) January 1, 1985, or ‘‘(ii) the effective date of any modification to pro- vide additional benefits after February 10, 1984. ‘‘(B) SPECIAL TRANSITION RULE FOR ADVANCE ELECTION BENEFIT BANKS.—Any benefit offered under a cafeteria plan in existence on February 10, 1984, which failed as of such date and continued to fail thereafter to satisfy the rules of section 105, 106, 120, or 129 under proposed Treasury regulations because an employee was assured of receiving (in cash or any other benefit) amounts available but unused for covered reimbursement during the year without regard to whether he incurred covered expenses, will not fail to be a nontaxable benefit under such applicable section solely because of such failure. The preceding sentence shall apply only with respect to benefits provided under cafeteria plans before the ear- lier of— ‘‘(i) July 1, 1985, or ‘‘(ii) the effective date of any modification to pro- vide additional benefits after February 10, 1984. Except as provided in Treasury regulations, the special transition rule is available only for benefits with re- spect to which, after December 31, 1984, contributions are fixed before the period of coverage and taxable cash is not available until the end of such period of cov- erage. ‘‘(C) PLANS FOR WHICH SUBSTANTIAL IMPLEMENTATION COSTS WERE INCURRED.—For purposes of this paragraph, any plan with respect to which substantial implemen- tation costs had been incurred before February 10, 1984, shall be treated as in existence on February 10, 1984. ‘‘(D) COLLECTIVE BARGAINING AGREEMENTS.—In the case of any cafeteria plan in existence on February 10, 1984, and maintained pursuant to 1 or more collective bargaining agreements between employee representa- tives and 1 or more employers, the date on which the last of such collective bargaining agreements termi- nates (determined without regard to any extension thereof agreed to after July 18, 1984) shall be sub- stituted for ‘January 1, 1985’ in subparagraph (A) and for ‘July 1, 1985’ in subparagraph (B). For purposes of the preceding sentence, any plan amendment made pur- suant to a collective bargaining agreement relating to the plan which amends the plan solely to conform to any requirement added by this section (or any require- ment in the regulations under section 125 of the Inter- nal Revenue Code of 1954 [now 1986] proposed on May 6, 1984) shall not be treated as a termination of such col- lective bargaining agreement. ‘‘(E) SPECIAL RULE WHERE CONTRIBUTIONS OR REIM- BURSEMENTS SUSPENDED.—For purposes of subpara- graphs (A) and (B), a plan shall not be treated as not continuing to fail to satisfy the rules referred to in such subparagraphs with respect to any benefit pro- vided in the form of a flexible spending arrangement merely because contributions or reimbursements (or both) with respect to such plan were suspended before January 1, 1985.’’ § 126. Certain cost-sharing payments (a) General rule Gross income does not include the excludable portion of payments received under— (1) The rural clean water program author- ized by section 208(j) of the Federal Water Pol- lution Control Act (33 U.S.C. 1288(j)). (2) The rural abandoned mine program au- thorized by section 406 of the Surface Mining Control and Reclamation Act of 1977 (30 U.S.C. 1236).