U.S. · Employer fringe benefits
Cafeteria plans (section 125) explained.
Which benefits a cafeteria plan can include, which it cannot, the 2026 health FSA limit, and the nondiscrimination tests.
A cafeteria plan is a written plan that lets employees choose between cash or taxable benefits and certain qualified benefits. Choosing a qualified benefit does not make it taxable just because cash was an alternative. For plan years beginning in 2026, a health FSA salary reduction cannot exceed $3,400. Benefits outside the allowed list, or a plan that favors highly compensated or key employees, can make benefits taxable.
Compare Pub 15-B fringe benefits
Result
What a cafeteria plan is
Publication 15-B (2026) describes a cafeteria plan, including an FSA, as giving participants an opportunity to receive qualified benefits on a pre-tax basis. It is a written plan that allows your employees to choose between receiving cash or taxable benefits, instead of certain qualified benefits for which the law provides an exclusion from wages. If an employee chooses a qualified benefit under the plan, the fact that the employee could have taken cash or a taxable benefit instead does not make the qualified benefit taxable.
Generally a cafeteria plan cannot include any plan that offers a benefit that defers pay. The exceptions the publication names are a qualified 401(k) plan, and certain life insurance plans maintained by educational institutions.
Benefits a cafeteria plan can include
- Accident and health benefits, but not Archer MSAs or long-term care insurance.
- Adoption assistance (see the adoption assistance page).
- Dependent care assistance (see the dependent care page).
- Group-term life insurance coverage, including costs that cannot be excluded from wages.
- Health savings accounts. Distributions may be used to pay eligible long-term care insurance premiums or qualified long-term care services.
Benefits a cafeteria plan cannot include
The publication lists the benefits that are not allowed: Archer MSAs; athletic facilities; de minimis benefits; educational assistance; employee discounts; employer-provided cell phones; lodging on your business premises; meals; no-additional-cost services; retirement planning services; transportation (commuting) benefits; tuition reduction; and working condition benefits. A cafeteria plan also cannot include scholarships or fellowships (discussed in Pub. 970). In plain terms, most of the other benefits on this site’s Pub 15-B pages, such as meals and educational assistance, are excluded by their own rules and cannot be offered as pre-tax choices against cash in a cafeteria plan.
The 2026 health FSA limit
For plan years beginning in 2026, the publication says a cafeteria plan may not allow an employee to request salary reduction contributions for a health FSA in excess of $3,400. A cafeteria plan that does not limit health FSA contributions to the dollar limit is not a cafeteria plan, and all benefits offered under the plan are includible in the employee’s gross income; the publication refers to Notice 2012-40 for details. In place of a grace period you may amend the plan to allow an employee’s unused contributions to carry over to the following plan year; see Notice 2013-71 and Notice 2020-33. The site’s FSA and HSA limits by year and use-it-or-lose-it deadline calculator cover the account-side details.
Who is an employee
For cafeteria plans the publication treats as employees a current common-law employee, a full-time life insurance agent who is a current statutory employee, and a leased employee who has provided substantially full-time services for at least a year under your primary direction or control. Do not treat a 2% shareholder of an S corporation as an employee; treat the shareholder as a partner for fringe benefit purposes, without treating the benefit as a reduction in distributions. A 2% shareholder owns, on any day of the tax year, more than 2% of the stock or voting power.
Nondiscrimination: highly compensated and key employees
Highly compensated employees. If your plan favors highly compensated employees as to eligibility, contributions or benefits, you must include in their wages the value of the taxable benefits they could have selected. A plan maintained under a collective bargaining agreement does not favor them. The publication’s list for this purpose: an officer; a shareholder who owns more than 5% of the voting power or value of all classes of stock; an employee who is highly compensated based on facts and circumstances; and a spouse or dependent of any of those.
Key employees. A plan favors key employees if more than 25% of the total nontaxable benefits you provide for all employees under the plan go to key employees. In that case you must include in their wages the value of taxable benefits they could have selected. Again, a plan under a collective bargaining agreement is not treated as favoring key employees.
HSA contributions through a cafeteria plan
You may contribute to an employee’s HSA using a cafeteria plan, and the contributions are not subject to the statutory comparability rules. Cafeteria plan nondiscrimination rules still apply, so contributions to employee HSAs cannot be greater for higher-paid employees than for lower-paid employees, although contributions favoring lower-paid employees are not prohibited. Report your contributions in box 12 of Form W-2 with code W. The W-2 code list is on the site’s box 12 lookup.
Employment taxes
Because each qualified benefit keeps its own exclusion, the employment tax result depends on the benefit chosen and follows that benefit’s row in Table 2-1. Accident and health benefits and dependent care assistance (up to its limit) are exempt from income tax withholding, social security and Medicare, and FUTA; adoption assistance is exempt from income tax withholding only and remains subject to social security, Medicare and FUTA. A benefit that fails the plan rules, or that is taken in a plan that does not qualify, is included in wages and reported in boxes 1, 3 and 5. Do not assume a payroll deduction labelled pre-tax is excluded without checking that the benefit is on the allowed list and that the plan is in writing.
Pub 15-B fringe benefits at a glance
| Benefit | 2026 limit or test, per Pub 15-B | Reporting, per Pub 15-B |
|---|---|---|
| De Minimis Benefits | No general dollar cap. Test is value and frequency. Specific figures: $21 a month for discounted transit passes; $2,000 face amount of spouse or dependent group-term life; 85% business use for a copier. | Excluded benefits are not included in wages. Cash and cash equivalents are always taxable and go in boxes 1, 3 and 5 of Form W-2. |
| Achievement Awards | $1,600 a year for qualified plan awards ($400 for awards that are not qualified plan awards). Tangible personal property for length of service or safety only. | Value above the allowable deduction is included in wages (boxes 1, 3, 5). Excluded value is not reported. |
| Educational Assistance ($5,250) | $5,250 a year per employee under a written educational assistance program. Includes qualified student loan payments made after March 27, 2020. | Amounts over $5,250 are included in wages (boxes 1, 3, 5) unless they are working condition benefits. |
| Dependent Care Assistance | $7,500 a year ($3,750 if married filing separately), not more than the smaller of the employee’s or spouse’s earned income. | Report all dependent care assistance in Form W-2 box 10, including the part over $7,500; the excess is also in boxes 1, 3 and 5. |
| Adoption Assistance | $17,670 exclusion for 2026. Excluded from income tax withholding, but taxable for social security, Medicare and FUTA. | Report all qualifying adoption expenses paid or reimbursed, including amounts over the exclusion, in Form W-2 box 12 with code T. |
| Meals on Business Premises | No dollar limit. Test: furnished on business premises and for the employer’s convenience. 2% S corporation shareholders are not treated as employees. | Excluded meals are not reported. Meals that fail the test are included in wages (boxes 1, 3, 5). |
| No-Additional-Cost Services | No dollar limit. Test: excess-capacity service in the employee’s own line of business with no substantial additional cost (lost revenue counts). | Excluded services are not reported. Highly compensated employees lose the exclusion if the service is not offered on the same terms to all or a nondiscriminatory group. |
| Cents-per-Mile Valuation Rule | Personal miles x the IRS standard mileage rate. Allowed if regularly used in business (50% safe harbor) or driven 10,000+ miles a year primarily by employees. Not allowed above the maximum automobile value. | Include the value in wages (boxes 1, 3, 5) or have the employee reimburse it. |
| Cafeteria Plan | Health FSA salary reduction limit of $3,400 for plan years beginning in 2026. No dollar limit on the plan itself; each benefit has its own exclusion. | Benefits that are not qualified, or that favor highly compensated or key employees, are included in wages (boxes 1, 3, 5). Qualified benefits keep their own reporting rules. |
| Working Condition Fringe | No dollar limit. Excluded to the extent the employee could have deducted the cost as a business or depreciation expense, with substantiation. | Excluded value is not reported. Independent contractors and directors have extra exceptions (product testing, parking). |
| Lodging on Business Premises | No dollar limit. All three tests: on business premises, for employer convenience, condition of employment. 2% S corporation shareholders are not treated as employees. | Excluded lodging is not reported. Lodging that fails any test is included in wages (boxes 1, 3, 5). |
Other pages in this set
De Minimis Benefits, Achievement Awards, Educational Assistance ($5,250), Dependent Care Assistance, Adoption Assistance, Meals on Business Premises, No-Additional-Cost Services, Cents-per-Mile Valuation Rule, Working Condition Fringe, Lodging on Business Premises.
Sources
- IRS Publication 15-B (2026), Employer’s Tax Guide to Fringe Benefits: section 2, Cafeteria Plans; Table 2-1; section 4 reporting. Page last reviewed April 30, 2026. Read November 2, 2026.
Every dollar figure on this page is a 2026 figure from the publication unless a different year is stated. The IRS can change a publication at any time, and the publication, your plan documents and a payroll professional control over this page. This page restates the publication and does not extend it to facts it does not address.
Frequently asked questions
What is a cafeteria plan?
A written plan that lets employees choose between cash or taxable benefits and certain qualified benefits that the law excludes from wages, so choosing a qualified benefit does not make it taxable.
What is the 2026 health FSA limit?
Publication 15-B (2026) says plan years beginning in 2026 cannot allow health FSA salary reductions above $3,400.
What happens if the plan exceeds the health FSA limit?
A plan that does not limit health FSA contributions is not a cafeteria plan, and all benefits offered under it are includible in gross income.
Can a cafeteria plan include educational assistance or meals?
No. The publication lists educational assistance, meals, lodging, de minimis benefits, working condition benefits and others as benefits a cafeteria plan cannot include.
What makes a plan discriminatory?
Favoring highly compensated employees in eligibility, contributions or benefits, or giving more than 25% of the plan’s nontaxable benefits to key employees.
Not tax or legal advice
This page summarizes IRS Publication 15-B and is not tax, legal or financial advice. Whether a benefit is excluded depends on your plan terms and facts. A CPA, enrolled agent, payroll provider or tax attorney can confirm what applies to you. Everything runs in your browser; nothing you enter is sent anywhere.