Federal statute that an employer may maintain a separate written plan for employees that meets specific requirements and regulations and provides participants an opportunity to receive certain benefits on a pretax basis. Also known as cafeteria plan . Participants in a cafeteria plan must be permitted to choose among at least one taxable benefit (such as cash) and one qualified benefit. A qualified benefit is a benefit that does not defer compensation and is excludable from an employee’s gross income under a specific provision of the Code, without being subject to the principles of constructive receipt. Qualified benefits include accident and health benefits (but not Archer medical savings accounts or long-term care insurance); adoption assistance; dependent care assistance; group-term life insurance coverage; health savings accounts including distributions to pay long-term care services. The written plan must specifically describe all benefits and establish rules for eligibility and elections. A section 125 plan is the only means by which an employer can offer employees a choice between taxable and nontaxable benefits without the choice causing the benefits to become taxable. A plan offering only a choice between taxable benefits is not a section 125 plan. Employer contributions to the cafeteria plan are usually made pursuant to salary reduction agreements between the employer and the employee in which the employee agrees to contribute a portion of his or her salary on a pretax basis to pay for the qualified benefits. Salary reduction contributions are not actually or constructively received by the participant. Therefore those contributions are not considered wages for federal income tax purposes. In addition, those sums generally are not subject to FICA and FUTA.

Federal regulation allows the establishment of a trust for minors so that income can be collected until the minor reaches age 21. Then the income can be paid out and the $10,000 annual gift tax exclusion for each beneficiary can be applied.

Under the Internal Revenue Code federal statutes, allows employees to set up a retirement plan (trust) within the employer’s defined benefit pension plan from which the employees’ life insurance and medical expense costs are paid. Contributions are tax deductible and earnings accumulated are not taxable until the funds are withdrawn.

Under the Internal Revenue Code federal statutes, employer-sponsored retirement savings program. Employees contribute and employers may match contributions that are not taxable until the funds are withdrawn. Referred to as a cash or deferred arrangement (CODA) . See salary reduction plan .

Under the Internal Revenue Code federal statutes, allows an employee in an employee stock ownership plan (ESOP) trust to reinvest dividends into their Section 401(k) plans (a switchback approach). Participants may reinvest their dividends into this “KSOP” on a tax-deferred basis or obtain the dividends in cash and pay income tax. If reinvested, the contribution is reduced by the amount of the dividend. Also referred to by the acronym KSOP or 401k.

Federal legislation allows establishment of a secular trust that is a nonqualified plan of deferred compensation and is irrevocable. It compensates key employees but does not give similar benefits to rank and file employees. The company may take an income tax deduction for the contributed funds even though they have not been given to the employee during the current taxable income period. When the funds are paid out, the employee is taxed only to the extent that these funds are from earnings of the trust or from current trust income. This allows the employee to pay taxes owed as the result of the company’s contributions to the trust. The employer is not taxed on the trust income and the employee pays all taxes on this income. Also called a nonexempt trust .