The Cafeteria Plan “Uniform” Rules

Question: What are the Section 125 cafeteria plan rules that require contributions and benefits to be provided on a “uniform” basis?

Short Answer: Health FSAs must provide “uniform coverage,” the Section 125 nondiscrimination rules require employers to provide a “uniform election” with respect to contributions, and employers must implement cafeteria plan elections on a “uniform interval”.

The Basics: Section 125 Cafeteria Plans
The Section 125 cafeteria plan facilitates employee elections between taxable income and nontaxable health and welfare benefits, allowing employees to contribute on a pre-tax basis to a variety of “qualified benefits” such as medical, dental, vision, health FSA, dependent care FSA, and HSA.

For more details:

• Newfront Section 125 Cafeteria Plan Guide

• The Section 125 Safe Harbor from Constructive Receipt

The Three “Uniform” Requirements for Cafeteria Plans
The Section 125 rules impose multiple requirements for cafeteria plans to maintain their tax-advantaged status, including adoption of a plan document, irrevocable elections, limiting benefits to only those that are qualified, and the FSA use-it-or-lose-it rule, substantiation requirements, and forfeiture allocation restrictions.

Among these cafeteria plan requirements are three distinct mandates that the plan provide certain contributions and benefits on a “uniform” basis:

1. The Uniform Coverage Rule

2. The Uniform Election Rule

3. The Uniform Interval Rule

The Uniform Coverage Rule: Full Health FSA Election Available During Plan Year
The Section 125 proposed regulations and additional IRS guidance confirm that the health FSA “Uniform Coverage Rule” requires the full amount of a participant’s election be available for reimbursement at all times during the plan year.

There are several important principles that flow from the health FSA Uniform Coverage Rule:

• The employee’s health FSA election is the only relevant factor in determining the amount available for reimbursement.

• Employees must have full access to the health FSA election amount during the entire plan year, even prior to making contributions at the start of the plan year.

• Employees can submit claims for health FSA reimbursement that exceed their year-to-date contribution amount.

• Employers cannot modify or accelerate the employee’s health FSA contribution amount to address claims reimbursed exceeding year-to-date contributions.

• Employers cannot recover any amount from an employee who terminates employment mid-year with an overspent health FSA.

The Uniform Coverage Rule creates the risk of experience losses (borne by the employer) caused by overspent accounts from employees who terminate mid-year. However, it is also common for there to be significant forfeitures at the end of the health FSA plan year caused by the use-it-or-lose-it rule. These forfeitures frequently cause net experience gains (i.e., total employee forfeitures exceeding overspent account losses).

• For more details: FSA Experience Gains from Forfeitures

This risk-shifting process imposed by the combination of the Uniform Coverage Rule (overspent accounts) and the use-it-or-lose-it rule (forfeitures) is designed to conform to the Code Sections 105 and 106 requirements for insurance-style risk shifting in tax-free health coverage.

• Note: The Uniform Coverage Rule explicitly states that it does not apply to dependent care FSAs, for which participants have access to reimbursement for only their current year-to-date contributions.

The Uniform Election Rule: Nondiscriminatory Contributions for Highly Compensated Participants
The Section 125 cafeteria plan rules govern employee pre-tax contributions to the health plan, including provisions designed to ensure that contributions and benefits are available on a nondiscriminatory basis for highly compensated participants (HCPs) and non-HCPs. For purposes of the Section 125 nondiscrimination rules, an HCP is:

• An officer;

• A more-than-5% owner of the employer in the current or preceding year; or

• An employee who earned in excess of $160,000 (2026 testing) in the prior plan year.
  

A key component of these contributions and benefits nondiscrimination rules requires that the cafeteria plan provide a “uniform election with respect to employer contributions.” This “Uniform Election Rule” is designed to prevent employers from contributing more for certain highly paid classes (HCPs such as executives or managers) to participate in the same health plan option for which non-HCPs are eligible.

The Uniform Election Rule generally prohibits providing any HCPs a larger employer contribution for the same plan option for which a non-HCP is eligible. In other words, if both HCPs and non-HCPs are eligible for the same plan option, the employer contribution generally must be at least as generous as for non-HCPs.

• Key Point: Contribution structures that require certain non-HCPs to contribute more for the same benefit generally do not satisfy this Uniform Election Rule. Employers generally must offer non-HCP employees at least the same employer contribution amount available to HCPs for the same plan option, such as a medical, dental, or vision plan option for which both the non-HCPs and HCPs are eligible.

The Uniform Election Rule also applies for HSA purposes if employees can contribute to the HSA through payroll on a pre-tax basis. This means that employers generally must make at least the same employer HSA contribution amount available to non-HCPs as to any HCPs enrolled in the same HDHP plan option.

Contributions May Vary for “Similarly Situated” Classes of Employees
The Uniform Election Rule prevents employers from providing a greater contribution for any HCP than any non HCPs who are “similarly situated participants” eligible for the same plan option. Thus, employers may provide a greater contribution to classes of employees with HCPs if the non-HCPs are not “similarly situated.” The rules provide that “reasonable differences in plan benefits may be taken into account” to determine which participants are “similarly situated,” which allows for some common class-based contribution distinctions.

Geographic Location-Based Contribution Classes Permitted
The definition of “similarly situated” expressly recognizes the employer’s ability to categorize employee groups based on “employees working in different geographical locations”. Employers therefore generally may design different contribution structures for employee classes by region without violating the Uniform Election Rule.

Division-Based Contribution Classes Likely Permitted
While not expressly addressed in the definition of “similarly situated,” many practitioners also interpret the Uniform Election Rule to permit different contribution strategies for employers with multiple EINs for subsidiaries, divisions, or other related entities within the same controlled group participating in the same underlying health benefits. The nondiscrimination rules appear to accommodate employers in this situation through either a) allowing employers to disaggregate and test separately the contributions and benefits provided for each division within a cafeteria plan, or b) creating a separate cafeteria plan for each entity with differing contribution structures. This is a reasonable and common approach for employers to consider where the organization has a bona fide division-based class that is not designed to favor HCPs in operation.

The Common Workaround to the Uniform Election Rule
Employers often face competitive pressures to offer certain classes of HCPs (e.g., executives, upper management) more generous contributions to the health plan than non-HCPs. This is generally not an option for HCPs who are “similarly situated” to non-HCPs because of the Uniform Election Rule limitations.

Employers commonly avoid this restriction by providing higher standard compensation to the HCP class. The HCPs can make an election (through the Section 125 cafeteria plan) to apply the additional compensation on a pre-tax basis to the employee-share of the health plan premium. This compensation boost can put both parties in the same position as if the HCP had received the more generous employer health plan contribution.

Example:

• Fast Moving Tech pays 70% of the health plan premium for employees.

• Because of competitive pressures in the marketplace, Fast Moving Tech wishes to increase its contribution to 90% for a certain class of executives and upper management who are HCPs.

• The desired approach would drop the employee contribution at issue from $300/month to $100/month.

Result:

• Fast Moving Tech determines the Uniform Election Rule prevents the HCP contribution increase.

• Instead, Fast Moving Tech provides an additional $200 raise per month to the group of HCPs, regardless of enrollment.

• The HCPs enrolled in the health plan use that $200 to pay the employee-share of the premium on a pre-tax basis through the Section 125 cafeteria plan.

• Although these employees are still paying $300/month for the health plan, they effectively pay $200 less when adjusting for the raise intended to cover that amount.

• The net result is that the HCPs effectively pay $100/month for the health plan, as intended.

Effect of a Discriminatory Cafeteria Plan
If the IRS were to find an employer’s cafeteria plan contribution structure discriminatory, HCPs could be taxed on their contributions. For example, an HCP who paid $500/month for coverage on a pre-tax basis under a discriminatory cafeteria plan could retroactively have those contributions included in taxable gross income.

• For more details: Health Benefits by Class

The Uniform Interval Rule: Consistent Contributions Throughout the Plan Year
Employees’ elections to pay the employee-share of the premium for health and welfare plan coverage on a pre-tax basis, or make pre-tax FSA or HSA contributions, are governed by the Section 125 cafeteria plan rules. These rules require that the interval for employee salary reduction contributions be uniform for all participants, often referred to as the “Uniform Interval Rule”.

The Uniform Interval Rule offers employers the discretion to specify any consistent interval for taking employee contributions. Almost all employers provide a uniform contribution interval throughout the plan year designed to mirror their standard payroll schedule (e.g., semi-monthly or bi-weekly contribution intervals). In some cases, employers may design the intervals to mirror a specific timeframe related to the industry work calendar, such as excluding the summer months for school districts.

Note: While the Uniform Interval Rule appears in a section of the regulations addressing FSA contributions, it is often interpreted more broadly in the cafeteria plan context.

Although it is not explicit in the Uniform Interval Rule that employers must take salary reduction contributions ratably throughout all of the intervals (which in most cases spread through the full plan year), it is unlikely the Uniform Interval Rule permits employees to elect to contribute different amounts at any particular interval. Accordingly, the Uniform Interval Rule is generally viewed as a barrier to front-loading employee contributions.

Common Employee Front-Load Request #1: Dependent Care FSA
Given that the dependent care FSA is not subject to the Uniform Coverage Rule, employees often request to front load dependent care FSA contributions at the start of the plan year or prior to a planned termination of employment. Employers generally will not accommodate these requests because the Uniform Interval Rule is widely interpreted to require ratable contributions throughout the plan year.

Example:

• Employee elects to contribute $7,500 to her employer Fast Moving Tech’s dependent care FSA.

• Fast Moving Tech has 24 semi-monthly pay periods used as its contribution interval for all employees.

• The employee’s per-pay period dependent care FSA contribution amount is $312.50, which is the ratable contribution of $7,500 over 24 pay periods.

Result:

• Fast Moving Tech generally should not accommodate an employee’s request to front-load contributions at $1,875 for each of the first four pay periods (to reach $7,500 by the end of February).

• Fast Moving Tech generally should also not accommodate an employee’s request to increase contributions for a specific payroll, such as when receiving a bonus or prior to a planned termination.

Common Employee Front-Load Request #2: HSA
Employees often believe they can follow the same approach as with their 401(k) election to front-load and “max out” their HSA contributions through payroll at the start of the year or prior to termination of employment. However, most employers implement the employee’s election ratably pursuant to the Uniform Interval Rule by taking the standard per-paycheck HSA contribution spread over the full plan year.

Example:

• Employee elects to contribute $4,400 to the HSA through Fast Moving Tech’s payroll.

• Fast Moving Tech has 24 semi-monthly pay periods used as its contribution interval for all employees.

• The employee’s per-pay period HSA contribution amount is $183.33, which is the ratable contribution of $4,400 over 24 pay periods.

Result:

• Fast Moving Tech generally should not accommodate an employee’s request to front-load contributions at $1,100 for each of the first four pay periods (to reach $4,400 by the end of February).

• Fast Moving Tech generally should also not accommodate the employee’s request to increase contributions for a specific payroll, such as when receiving a bonus or prior to a planned termination.

In addition to the potential Uniform Interval Rule issues, front-loading HSA contributions through payroll may cause excess HSA contributions under the proportional contribution rule if the employee loses HSA eligibility.

For more details:

• Newfront Go All the Way with HSA Guide

• The HSA Contribution Rules

Employees can always front-load HSA contributions outside of payroll and claim the above-the-line deduction on Schedule 1 of their individual tax return. This approach receives the same income tax treatment as a pre-tax contribution through the cafeteria plan, but it does not enjoy the exemption from payroll taxes (generally, the FICA 6.2% Social Security and 1.45% Medicare payroll taxes).

• Note: There is a potential argument that the Uniform Interval Rule’s ratable contribution requirement should not apply to HSA contributions because of the special Section 125 rule permitting employees to change their HSA contribution amount without experiencing a permitted election change event.

Summary
Section 125 cafeteria plans must comply by three distinct “uniform” requirements in plan design and operations—the Uniform Coverage Rule, the Uniform Election Rule, and the Uniform Interval Rule. Employers should be familiar with these restrictions and the best practices to avoid potential violations.

Relevant Cites:

Prop. Treas. Reg. §1.125-5:

[The Uniform Coverage Rule]
(d) Uniform coverage rules applicable to health FSAs.
(1) Uniform coverage throughout coverage period—in general. The maximum amount of reimbursement from a health FSA must be available at all times during the period of coverage (properly reduced as of any particular time for prior reimbursements for the same period of coverage). Thus, the maximum amount of reimbursement at any particular time during the period of coverage cannot relate to the amount that has been contributed to the FSA at any particular time prior to the end of the plan year. Similarly, the payment schedule for the required amount for coverage under a health FSA may not be based on the rate or amount of covered claims incurred during the coverage period. Employees' salary reduction payments must not be accelerated based on employees' incurred claims and reimbursements.
…
[The Uniform Interval Rule]
(g) FSA administrative practices.
…
(2) Interval for employees' salary reduction contributions. The cafeteria plan is permitted to specify any interval for employees' salary reduction contributions. The interval specified in the plan must be uniform for all participants.

IRS Chief Counsel Advice 201012060:

[The Uniform Coverage Rule]
Under the uniform coverage rules, the maximum amount of reimbursement from a health FSA must be available at all times during the coverage period. This means that the employee’s entire health FSA election is available from the first day of the plan year to reimburse qualified medical expenses incurred during the coverage period. The cafeteria plan may not, therefore, base its reimbursements to an employee on what that employee may have contributed up to any particular date, such as the date the employee is laid-off or terminated. Thus, if an employee’s reimbursements from the health FSA exceed his contributions to the health FSA at the time of lay-off or termination, the employer cannot recoup the difference from the employee.

Prop. Treas. Reg. §1.125-7:

[The Uniform Election Rule]
(c) Nondiscrimination as to contributions and benefits.
(1) In general. A cafeteria plan must not discriminate in favor of highly compensated participants as to contributions and benefits for a plan year.
(2) Benefit availability and benefit election. A cafeteria plan does not discriminate with respect to contributions and benefits if either qualified benefits and total benefits, or employer contributions allocable to statutory nontaxable benefits and employer contributions allocable to total benefits, do not discriminate in favor of highly compensated participants. A cafeteria plan must satisfy this paragraph (c) with respect to both benefit availability and benefit utilization. Thus, a plan must give each similarly situated participant a uniform opportunity to elect qualified benefits, and the actual election of qualified benefits through the plan must not be disproportionate by highly compensated participants (while other participants elect permitted taxable benefits)…A plan must also give each similarly situated participant a uniform election with respect to employer contributions, and the actual election with respect to employer contributions for qualified benefits through the plan must not be disproportionate by highly compensated participants (while other participants elect to receive employer contributions as permitted taxable benefits).
…
Similarly situated. In determining which participants are similarly situated, reasonable differences in plan benefits may be taken into account (for example, variations in plan benefits offered to employees working in different geographical locations or to employees with family coverage versus employee-only coverage).

Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship. Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).