Prior to enactment of Section 125, if a cafeteria plan offered cash, then amounts
paid by the employer for all benefits under the plan were generally taxable to the
employee for both income and Federal Insurance Contribution Act (FICA) purposes.
Effective January 1, 1979, SSA and the Internal Revenue Service (IRS) agreed that
simply offering cash (or other taxable benefits) as an option in a cafeteria plan,
did not constitute constructive payment for Social Security and FICA purposes. In
addition, the employer excluded contributions from the “wages” of the participant,
if the options chosen by them under the plan qualified as a wage exclusion under Section
209 of the Social Security Act. Employee payments continue as wages for Social Security
purposes.