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Cafeteria Plans
TB-39(R) – Issued March 3, 2003
Tax: Gross Income Tax
The New Jersey Gross Income Tax law does not adopt the federal income tax treatment of
cafeteria plans as provided under I.R.C. Section 125. However, the New Jersey Gross Income Tax
law has a very limited exclusion for one particular type of cafeteria plan, not including any
salary-reduction plan. Since the New Jersey exclusion is limited, the value of cafeteria plan
benefits typically is includable in New Jersey taxable wages and subject to Gross Income
Tax withholding.*
Under N.J.S.A. 54A:6-24, the value of a cafeteria plan benefit is excludable from New Jersey
gross income if all of the following qualifications are met:
1) the value is excludable for federal income tax purposes and the plan meets the requirements
of I.R.C. Section 125;
2) the option to receive cash, instead of federally excludable cafeteria plan benefit, is
conditioned on the employee having a similar benefit from another source;
3) the cafeteria plan benefit is not provided pursuant to a salary reduction agreement or an
agreement to forgo increases in compensation, including (but not limited to) agreements
commonly known as flexible spending accounts or premium conversion options; and
4) the employee elects to receive the cafeteria plan benefit, instead of cash.
EXAMPLES:
1) A Section 125 cafeteria plan allows employees to receive a health insurance benefit if the
employee agrees to reduce his or her annual salary by $2,400. Sue chooses to receive the
benefit by agreeing to the reduction. For New Jersey Gross Income Tax purposes, Sue’s full
salary, without the reduction, is subject to tax and withholding. The cafeteria plan benefit cannot
meet the New Jersey requirements for excludability because the benefit is provided pursuant to
a salary reduction agreement.
* The Gross Income Tax treatment of contributions to a qualified I.R.C. Section 401(k) plan (not
including the Federal Thrift Savings Plan) follows the federal treatment, including when they are
made through a cafeteria plan. N.J.S.A. 54A:6-21.
2) A Section 125 cafeteria plan includes a flexible spending arrangement (FSA) under which an
employee may agree to have up to $2,000 a year deducted from his or her salary for medical
expenses reimbursement. Bob agrees to have $2,000 deducted from his salary for the FSA. For
New Jersey Gross Income Tax purposes, Bob’s full salary, without reduction, is subject to tax and
withholding. The FSA benefit cannot meet the New Jersey requirements for excludability
because it is provided pursuant to a salary reduction agreement.
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3) A Section 125 cafeteria plan offers employees $2,400 a year, as a supplement to regular
salary, to use for a health insurance benefit or to receive in cash. Harry chooses to receive the
health insurance benefit. For New Jersey Gross Income Tax purposes, Harry is subject to tax and
withholding on the $2,400 amount. The benefit does not meet the New Jersey requirements for
excludability, because the option to receive cash is not conditioned on the employee deriving a
similar benefit from another source.
4) Assume the same facts as in example 3, except the plan includes a provision under which
employees are allowed to receive the cash supplement only if the employee derives a similar
health insurance benefit from another source. Although Harry has similar health insurance
coverage through his wife’s employer, Harry prefers the coverage provided under his employer’s
plan and elects to receive the health insurance benefit provided by his employer. The $2,400
value is excludable from Harry’s gross income for New Jersey Gross Income Tax purposes. (If the
example is changed so that Harry selects the cash option, the cash amount would be includable
in his wages subject to tax and withholding.)
Note: A Technical Bulletin is an informational document designed to provide guidance on a
topic of interest to taxpayers and describe changes to the law, regulations, or Division policies. It
is accurate as of the date issued. However, taxpayers should be aware that subsequent changes
in the tax law or its interpretation may affect the accuracy of a Technical Bulletin. The
information provided in this document does not cover every situation and is not intended to
replace the law or change its meaning.
