Q. "If we let employees pay health care premiums with pre-tax dollars, is a 'cafeteria plan' actually required?"
Answer:
A cafeteria plan, governed by Section 125 of the Internal Revenue Code, is required for any ministry that allows employees to pay for certain qualified benefits—like medical, dental, or vision insurance premiums—using pre-tax dollars. Without this written plan, the IRS could challenge these deductions, which may expose both the ministry and its employees to back taxes and penalties.
The need for this plan applies to a wide range of ministries because pre-tax deductions are a very common way to handle benefits. While the plan itself is a requirement, hiring a Third-Party Administrator (TPA) to manage it is considered a best practice. A TPA ensures your plan is administered correctly and that you stay in good standing with the IRS, saving you from complex and risky administrative work.