The Internal Revenue Code (IRC), amended January 1, 1979, added a new Section 125 - Cafeteria Plans, creating special provisions for the income tax treatment of benefits offered under cafeteria plans.

A cafeteria plan is a benefit plan offered by an employer where:

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  All participants are employees, and

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  Participants can choose from a menu of two or more benefits, which may be nontaxable benefits or cash, property, or other taxable benefits.

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.