
From the U.S. Code Online via GPO Access
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[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[CITE: 26USC125]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
               Subchapter B--Computation of Taxable Income
 
         PART III--ITEMS SPECIFICALLY EXCLUDED FROM GROSS INCOME
 
Sec. 125. Cafeteria plans


(a) General rule

    Except as provided in subsection (b), no amount shall be included in 
the gross income of a participant in a cafeteria plan solely because, 
under the plan, the participant may choose among the benefits of the 
plan.

(b) Exception for highly compensated participants and key employees

                 (1) Highly compensated participants

        In the case of a highly compensated participant, subsection (a) 
    shall not apply to any benefit attributable to a plan year for which 
    the plan discriminates in favor of--
            (A) highly compensated individuals as to eligibility to 
        participate, or
            (B) highly compensated participants as to contributions and 
        benefits.

                          (2) Key employees

        In the case of a key employee (within the meaning of section 
    416(i)(1)), subsection (a) shall not apply to any benefit 
    attributable to a plan for which the statutory nontaxable benefits 
    provided to key employees exceed 25 percent of the aggregate of such 
    benefits provided for all employees under the plan. For purposes of 
    the preceding sentence, statutory nontaxable benefits shall be 
    determined without regard to the last sentence of subsection (f).

                        (3) Year of inclusion

        For purposes of determining the taxable year of inclusion, any 
    benefit described in paragraph (1) or (2) shall be treated as 
    received or accrued in the taxable year of the participant or key 
    employee in which the plan year ends.

(c) Discrimination as to benefits or contributions

    For purposes of subparagraph (B) of subsection (b)(1), a cafeteria 
plan does not discriminate where qualified benefits and total benefits 
(or employer contributions allocable to qualified benefits and employer 
contributions for total benefits) do not discriminate in favor of highly 
compensated participants.

(d) Cafeteria plan defined

    For purposes of this section--

                           (1) In general

        The term ``cafeteria plan'' means a written plan under which--
            (A) all participants are employees, and
            (B) the participants may choose among 2 or more benefits 
        consisting of cash and qualified benefits.

              (2) Deferred compensation plans excluded

        (A) In general

            The term ``cafeteria plan'' does not include any plan which 
        provides for deferred compensation.

        (B) Exception for cash and deferred arrangements

            Subparagraph (A) shall not apply to a profit-sharing or 
        stock bonus plan or rural cooperative plan (within the meaning 
        of section 401(k)(7)) which includes a qualified cash or 
        deferred arrangement (as defined in section 401(k)(2)) to the 
        extent of amounts which a covered employee may elect to have the 
        employer pay as contributions to a trust under such plan on 
        behalf of the employee.

        (C) Exception for certain plans maintained by educational 
                institutions

            Subparagraph (A) shall not apply to a plan maintained by an 
        educational organization described in section 170(b)(1)(A)(ii) 
        to the extent of amounts which a covered employee may elect to 
        have the employer pay as contributions for post-retirement group 
        life insurance if--
                (i) all contributions for such insurance must be made 
            before retirement, and
                (ii) such life insurance does not have a cash surrender 
            value at any time.

        For purposes of section 79, any life insurance described in the 
        preceding sentence shall be treated as group-term life 
        insurance.

(e) Highly compensated participant and individual defined

    For purposes of this section--

                 (1) Highly compensated participant

        The term ``highly compensated participant'' means a participant 
    who is--
            (A) an officer,
            (B) a shareholder owning more than 5 percent of the voting 
        power or value of all classes of stock of the employer,
            (C) highly compensated, or
            (D) a spouse or dependent (within the meaning of section 
        152) of an individual described in subparagraph (A), (B), or 
        (C).

                  (2) Highly compensated individual

        The term ``highly compensated individual'' means an individual 
    who is described in subparagraphs \1\ (A), (B), (C), or (D) of 
    paragraph (1).
---------------------------------------------------------------------------
    \1\ So in original. Probably should be ``subparagraph''.
---------------------------------------------------------------------------

(f) Qualified benefits defined

    For purposes of this section, the term ``qualified benefit'' means 
any benefit which, with the application of subsection (a), is not 
includible in the gross income of the employee by reason of an express 
provision of this chapter (other than section 106(b), 117, 127, or 132). 
Such term includes any group term life insurance which is includible in 
gross income only because it exceeds the dollar limitation of section 79 
and such term includes any other benefit permitted under regulations. 
Such term shall not include any product which is advertised, marketed, 
or offered as long-term care insurance.

(g) Special rules

           (1) Collectively bargained plan not considered 
                               discriminatory

        For purposes of this section, a plan shall not be treated as 
    discriminatory if the plan is maintained under an agreement which 
    the Secretary finds to be a collective bargaining agreement between 
    employee representatives and one or more employers.

                         (2) Health benefits

        For purposes of subparagraph (B) of subsection (b)(1), a 
    cafeteria plan which provides health benefits shall not be treated 
    as discriminatory if--
            (A) contributions under the plan on behalf of each 
        participant include an amount which--
                (i) equals 100 percent of the cost of the health benefit 
            coverage under the plan of the majority of the highly 
            compensated participants similarly situated, or
                (ii) equals or exceeds 75 percent of the cost of the 
            health benefit coverage of the participant (similarly 
            situated) having the highest cost health benefit coverage 
            under the plan, and

            (B) contributions or benefits under the plan in excess of 
        those described in subparagraph (A) bear a uniform relationship 
        to compensation.

     (3) Certain participation eligibility rules not treated as 
                               discriminatory

        For purposes of subparagraph (A) of subsection (b)(1), a 
    classification shall not be treated as discriminatory if the plan--
            (A) benefits a group of employees described in section 
        410(b)(2)(A)(i), and
            (B) meets the requirements of clauses (i) and (ii):
                (i) No employee is required to complete more than 3 
            years of employment with the employer or employers 
            maintaining the plan as a condition of participation in the 
            plan, and the employment requirement for each employee is 
            the same.
                (ii) Any employee who has satisfied the employment 
            requirement of clause (i) and who is otherwise entitled to 
            participate in the plan commences participation no later 
            than the first day of the first plan year beginning after 
            the date the employment requirement was satisfied unless the 
            employee was separated from service before the first day of 
            that plan year.

                 (4) Certain controlled groups, etc.

        All employees who are treated as employed by a single employer 
    under subsection (b), (c), or (m) of section 414 shall be treated as 
    employed by a single employer for purposes of this section.

(h) Cross reference

            For reporting and recordkeeping requirements, see section 
        6039D.

(i) Regulations

    The Secretary shall prescribe such regulations as may be necessary 
to carry out the provisions of this section.

(Added Pub. L. 95-600, title I, Sec. 134(a), Nov. 6, 1978, 92 Stat. 
2783; amended Pub. L. 96-222, title I, Sec. 101(a)(6)(A), Apr. 1, 1980, 
94 Stat. 196; Pub. L. 96-605, title II, Secs. 201(b)(2), 226(a), Dec. 
28, 1980, 94 Stat. 3527, 3529; Pub. L. 96-613, Sec. 5(b)(2), Dec. 28, 
1980, 94 Stat. 3581; Pub. L. 98-369, div. A, title V, Sec. 531(b)(1)-
(4)(A), July 18, 1984, 98 Stat. 881, 882; Pub. L. 98-611, 
Sec. 1(d)(3)(A), Oct. 31, 1984, 98 Stat. 3177; Pub. L. 98-612, 
Sec. 1(b)(3)(B), Oct. 31, 1984, 98 Stat. 3181; Pub. L. 99-514, title XI, 
Sec. 1151(d)(1), title XVIII, Sec. 1853(b)(1), Oct. 22, 1986, 100 Stat. 
2504, 2870; Pub. L. 100-647, title I, Secs. 1011B(a)(11)-(13), 
1018(t)(6), title IV, Sec. 4002(b)(2), title VI, Sec. 6051(b), Nov. 10, 
1988, 102 Stat. 3484, 3485, 3589, 3643, 3696; Pub. L. 101-140, title II, 
Sec. 203(a)(1), (3), (b)(2), Nov. 8, 1989, 103 Stat. 830, 831; Pub. L. 
101-239, title VII, Sec. 7814(b), Dec. 19, 1989, 103 Stat. 2413; Pub. L. 
101-508, title XI, Sec. 11801(c)(3), Nov. 5, 1990, 104 Stat. 1388-523; 
Pub. L. 104-191, title III, Secs. 301(d), 321(c)(1), Aug. 21, 1996, 110 
Stat. 2051, 2058.)

                          Codification

    Pub. L. 101-140, Sec. 203(a)(1), amended this section to read as if 
the amendments made by section 1151(d)(1) of Pub. L. 99-514 (amending 
this section generally) had not been enacted. Subsequent to amendment by 
Pub. L. 99-514, this section was amended by Pub. L. 100-647 and Pub. L. 
101-239. See 1989 and 1988 Amendment notes below.


                            Prior Provisions

    A prior section 125 was renumbered section 139 of this title.


                               Amendments

    1996--Subsec. (f). Pub. L. 104-191, Sec. 321(c)(1), inserted at end 
``Such term shall not include any product which is advertised, marketed, 
or offered as long-term care insurance.''
    Pub. L. 104-191, Sec. 301(d), inserted ``106(b),'' before ``117''.
    1990--Subsec. (f). Pub. L. 101-508 substituted ``section 117,'' for 
``section 117, 124,''.
    1989--Pub. L. 101-140, Sec. 203(a)(1), amended section to read as if 
amendments by Pub. L. 99-514, Sec. 1151(d)(1), had not been enacted, see 
1986 Amendment note below.
    Subsec. (d)(2). Pub. L. 101-140, Sec. 203(b)(2), amended par. (2) 
generally. Prior to amendment, par. (2) read as follows: ``The term 
`cafeteria plan' does not include any plan which provides for deferred 
compensation. The preceding sentence shall not apply in the case of a 
profit-sharing or stock bonus plan which includes a qualified cash or 
deferred arrangement (as defined in section 401(k)(2)) to the extent of 
amounts which a covered employee may elect to have the employer pay as 
contributions to a trust under such plan on behalf of the employee.''
    Subsec. (e)(2)(A). Pub. L. 101-239 substituted ``includible only 
because'' for ``includable only because'', see Codification note above.
    Subsec. (g)(3)(A). Pub. L. 101-140, Sec. 203(a)(3), substituted 
``section 410(b)(2)(A)(i)'' for ``subparagraph (B) of section 
410(b)(1)''.
    1988--Subsec. (a). Pub. L. 100-647, Sec. 1011B(a)(11)(A), amended 
subsec. (a) generally, see Codification note above. Prior to amendment, 
subsec. (a) read as follows: ``In the case of a cafeteria plan--
        ``(1) amounts shall not be included in gross income of a 
    participant in such plan solely because, under the plan, the 
    participant may choose among the benefits of the plan, and
        ``(2) if the plan fails to meet the requirements of subsection 
    (b) for any plan year--
            ``(A) paragraph (1) shall not apply, and
            ``(B) notwithstanding any other provision of part III of 
        this subchapter, any qualified benefits received under such 
        cafeteria plan by a highly compensated employee for such plan 
        year shall be included in the gross income of such employee for 
        the taxable year with or within which such plan year ends.''
    Subsec. (b)(1). Pub. L. 100-647, Sec. 1011B(a)(11)(B), substituted 
``In the case of a highly compensated employee, subsection (a) shall not 
apply to any benefit attributable to a plan year'' for ``A plan shall be 
treated as failing to meet the requirements of this subsection'', see 
Codification note above.
    Subsec. (b)(2). Pub. L. 100-647, Sec. 1011B(a)(11)(C), substituted 
``subsection (a) shall not apply to any plan year'' for ``a plan shall 
be treated as failing to meet the requirements of this subsection'' in 
first sentence, see Codification note above.
    Pub. L. 100-647, Sec. 1011B(a)(13)(B), substituted ``shall not 
include benefits which (without regard to this paragraph) are includible 
in gross income'' for ``shall be determined without regard to the last 
sentence of subsection (e)'', see Codification note above.
    Subsec. (c)(1)(B). Pub. L. 100-647, Sec. 1011B(a)(12), amended 
subpar. (B) generally, see Codification note above. Prior to amendment, 
subpar. (B) read as follows: ``the participants may choose--
        ``(i) among 2 or more benefits consisting of cash and qualified 
    benefits, or
        ``(ii) among 2 or more qualified benefits.''
    Subsec. (c)(2)(B). Pub. L. 100-647, Sec. 1018(t)(6), inserted ``or 
rural electric cooperative plan (within the meaning of section 
401(k)(7))'' after ``stock bonus plan'', see Codification note above.
    Subsec. (c)(2)(C). Pub. L. 100-647, Sec. 6051(b), inserted at end 
``In applying section 89 to a plan described in this subparagraph, 
contributions under the plan shall be tested as of the time the 
contributions were made.'', see Codification note above.
    Subsec. (e)(1). Pub. L. 100-647, Sec. 1011B(a)(13)(A), inserted 
``and without regard to section 89(a)'' after ``subsection (a)'', see 
Codification note above.
    Subsec. (e)(2)(A). Pub. L. 100-647, Sec. 4002(b)(2), inserted ``or 
any insurance under a qualified group legal services plan the value of 
which is so includable only because it exceeds the limitation of section 
120(a)'' after ``section 79'', see Codification note above.
    1986--Pub. L. 99-514, Sec. 1151(d)(1), amended section generally, 
revising and restating as subsecs. (a) to (g) provisions of former 
subsecs. (a) to (i) so as to coincide with the coming into effect of 
section 89 of this title.
    Subsecs. (c), (d)(1)(B). Pub. L. 99-514, Sec. 1853(b)(1)(A), 
substituted ``qualified benefits'' for ``statutory nontaxable benefits'' 
wherever appearing.
    Subsec. (f). Pub. L. 99-514, Sec. 1853(b)(1)(B), substituted 
``Qualified benefits defined'' for ``Statutory nontaxable benefits 
defined'' in heading and amended text generally. Prior to amendment, 
text read as follows: ``For purposes of this section, the term 
`statutory nontaxable benefit' means any benefit which, with the 
application of subsection (a) is not includible in the gross income of 
the employee by reason of an express provision of this chapter (other 
than section 117, 124, 127, or 132). Such term includes any group term 
life insurance which is includible in gross income only because it 
exceeds the dollar limitation of section 79.''
    1984--Subsec. (b). Pub. L. 98-369, Sec. 531(b)(3), amended subsec. 
(b) generally, substituting ``and key employees'' for ``where plan is 
discriminatory'' in heading and ``Highly compensated participants'' for 
``In general'' in par. (1) heading, adding par. (2), redesignating 
former par. (2) as (3), and inserting therein references to par. (2) and 
to taxable year of key employee.
    Subsec. (c). Pub. L. 98-369, Sec. 531(b)(2)(B), inserted 
``statutory'' before ``nontaxable benefits'' in two places.
    Subsec. (d)(1). Pub. L. 98-369, Sec. 531(b)(1), substituted ``among 
2 or more benefits consisting of cash and statutory nontaxable 
benefits'' for ``among two or more benefits'' in cl. (B) and struck out 
``The benefits which may be chosen may be nontaxable benefits, or cash, 
property, or other taxable benefits.''
    Subsec. (f). Pub. L. 98-369, Sec. 531(b)(2)(A), amended subsec. (f) 
generally, inserting ``Statutory'' in heading and ``statutory'' before 
``nontaxable benefit'' in text, providing that the benefit be excluded 
by reason of an express provision of this chapter (other than section 
117, 124, 127, or 132), and extending the benefit to include group term 
life insurance.
    Subsec. (h). Pub. L. 98-611 and Pub. L. 98-612, made identical 
amendments, substituting cross reference provision for reporting 
requirements provisions.
    Pub. L. 98-369, Sec. 531(b)(4)(A), added subsec. (h) relating to 
reporting requirements provisions. Former subsec. (h) redesignated (i).
    Subsec. (i). Pub. L. 98-369, Sec. 531(b)(4)(A), redesignated subsec. 
(h) as (i).
    1980--Subsec. (d)(2). Pub. L. 96-605, Sec. 226(a), inserted 
provision that the sentence excluding deferred compensation plans not 
apply in the case of a profit-sharing or stock bonus plan which includes 
a qualified cash or deferred arrangement, as defined in section 
401(k)(2) to the extent of amounts which a covered employee may elect to 
have the employer pay as contributions to a trust under such plan on 
behalf of the employee.
    Subsec. (g)(3)(B). Pub. L. 96-222 substituted ``employment 
requirement'' for ``service requirement'' in cls. (i) and (ii).
    Subsec. (g)(4). Pub. L. 96-613, Sec. 5(b)(2), and Pub. L. 96-605, 
Sec. 201(b)(2), made identical amendments by substituting ``controlled 
groups, etc.'' for ``controlled groups'' in heading, and by substituting 
``subsection (b), (c), or (m) of section 414'' for ``subsection (b) or 
(c) of section 414'' in text.


                    Effective Date of 1996 Amendment

    Amendment by section 301(d) of Pub. L. 104-191 applicable to taxable 
years beginning after Dec. 31, 1996, see section 301(j) of Pub. L. 104-
191, set out as a note under section 62 of this title.
    Amendment by section 321(c)(1) of Pub. L. 104-191 applicable to 
contracts issued after Dec. 31, 1996, see section 321(f) of Pub. L. 104-
191, set out as an Effective Date note under section 7702B of this 
title.


                    Effective Date of 1989 Amendments

    Amendment by Pub. L. 101-239 effective, except as otherwise 
provided, as if included in the provision of the Technical and 
Miscellaneous Revenue Act of 1988, Pub. L. 100-647, to which such 
amendment relates, see section 7817 of Pub. L. 101-239, set out as a 
note under section 1 of this title.
    Amendment by Pub. L. 101-140 effective as if included in section 
1151 of Pub. L. 99-514, see section 203(c) of Pub. L. 101-140, set out 
as a note under section 79 of this title.


                    Effective Date of 1988 Amendment

    Amendment by sections 1011B(a)(11)-(13) and 1018(t)(6) of Pub. L. 
100-647 effective, except as otherwise provided, as if included in the 
provision of the Tax Reform Act of 1986, Pub. L. 99-514, to which such 
amendment relates, see section 1019(a) of Pub. L. 100-647, set out as a 
note under section 1 of this title.
    Amendment by section 4002(b)(2) of Pub. L. 100-647 applicable to 
taxable years ending after Dec. 31, 1987, see section 4002(c) of Pub. L. 
100-647, set out as a note under section 120 of this title.
    Section 6051(c) of Pub. L. 100-647 provided that: ``The amendments 
made by this section [amending this section and section 89 of this 
title] shall take effect as if included in the amendments made by 
section 1151 of the Reform Act [Pub. L. 99-514, see Effective Date of 
1986 Amendment note set out under section 79 of this title].''


                    Effective Date of 1986 Amendment

    Amendment by section 1151(d)(1) of Pub. L. 99-514 applicable, with 
certain qualifications and exceptions, to years beginning after Dec. 31, 
1988, see section 1151(k) of Pub. L. 99-514, as amended, set out as a 
note under section 79 of this title.
    Amendment by section 1853(b)(1) of Pub. L. 99-514 effective, except 
as otherwise provided, as if included in the provisions of the Tax 
Reform Act of 1984, Pub. L. 98-369, div. A, to which such amendment 
relates, see section 1881 of Pub. L. 99-514, set out as a note under 
section 48 of this title.


                    Effective Date of 1984 Amendments

    Amendment by Pub. L. 98-612 effective Jan. 1, 1985, see section 
1(d)(2) of Pub. L. 98-612.
    Amendment by Pub. L. 98-611 effective Jan. 1, 1985, see section 
1(g)(2) of Pub. L. 98-611, set out as a note under section 127 of this 
title.
    Amendment by Pub. L. 98-369 effective Jan. 1, 1985, see section 
531(h) of Pub. L. 98-369, set out as an Effective Date note under 
section 132 of this title.


                    Effective Date of 1980 Amendments

    Amendments by section 201(b)(2) of Pub. L. 96-605 and section 
5(b)(2) of Pub. L. 96-613 applicable to years ending after Nov. 30, 
1980, except in the case of a plan in existence on Nov. 30, 1980 where 
amendments by section 201(b)(2) of Pub. L. 96-605 and section 5(b)(2) of 
Pub. L. 96-613 applicable to plan years beginning after Nov. 30, 1980, 
see section 201(c) of Pub. L. 96-605 and section 5(c) of Pub. L. 96-613, 
set out as a note under section 414 of this title.
    Section 226(b) of Pub. L. 96-605 provided that: ``The amendment made 
by subsection (a) [amending this section] shall apply with respect to 
taxable years beginning after December 31, 1980.''
    Amendment by Pub. L. 96-222 effective, except as otherwise provided, 
as if it had been included in the provisions of the Revenue Act of 1978, 
Pub. L. 95-600, to which such amendment relates, see section 201 of Pub. 
L. 96-222, set out as a note under section 32 of this title.


                    Effective Date of 1978 Amendment

    Section 134(c) of Pub. L. 95-600, as amended by Pub. L. 96-222, 
title I, Sec. 101(a)(6)(B), Apr. 1, 1980, 94 Stat. 197, provided that: 
``The amendments made by this section [enacting this section] shall 
apply to plan years beginning after December 31, 1978.''


                            Savings Provision

    For provisions that nothing in amendment by Pub. L. 101-508 be 
construed to affect treatment of certain transactions occurring, 
property acquired, or items of income, loss, deduction, or credit taken 
into account prior to Nov. 5, 1990, for purposes of determining 
liability for tax for periods ending after Nov. 5, 1990, see section 
11821(b) of Pub. L. 101-508, set out as a note under section 29 of this 
title.


 Nonenforcement of Amendment Made by Section 1151 of Pub. L. 99-514 for 
                            Fiscal Year 1990

    No monies appropriated by Pub. L. 101-136 to be used to implement or 
enforce section 1151 of Pub. L. 99-514 or the amendments made by such 
section, see section 528 of Pub. L. 101-136, set out as a note under 
section 89 of this title.


  Treatment of Pre-1989 Elections for Dependent Care Assistance Under 
                             Cafeteria Plans

    Section 6063 of Pub. L. 100-647 provided that: ``For purposes of 
section 125 of the 1986 Code, a plan shall not be treated as failing to 
be a cafeteria plan solely because under the plan a participant elected 
before January 1, 1989, to receive reimbursement under the plan for 
dependent care assistance for periods after December 31, 1988, and such 
assistance is includible in gross income under the provisions of the 
Family Support Act of 1988 [Pub. L. 100-485, see Tables for 
classification].''
    For provision that for purposes of section 125 of the Internal 
Revenue Code of 1986, a plan shall not be treated as failing to be a 
cafeteria plan solely because under the plan a participant elected 
before January 1, 1988, to receive reimbursement under the plan for 
dependent care assistance for periods after December 31, 1987, and such 
assistance included reimbursement for expenses at a camp where the 
dependent stays overnight, see section 10101(b)(2) of Pub. L. 100-203, 
as added by Pub. L. 100-647, set out as an Effective Date of 1987 
Amendment note under section 21 of this title.


           Exception for Certain Cafeteria Plans and Benefits

    Section 531(b)(5) of Pub. L. 98-369, as amended by Pub. L. 99-514, 
title XVIII, Sec. 1853(b)(2), (3), Oct. 22, 1986, 100 Stat. 2870, 2871, 
provided that:
    ``(A) General transitional rule.--Any cafeteria plan in existence on 
February 10, 1984, which failed as of such date and continued to fail 
thereafter to satisfy the rules relating to section 125 under proposed 
Treasury regulations, and any benefit offered under such a cafeteria 
plan which failed as of such date and continued to fail thereafter to 
satisfy the rules of section 105, 106, 120, or 129 under proposed 
Treasury regulations, will not fail to be a cafeteria plan under section 
125 or a nontaxable benefit under section 105, 106, 120, or 129 solely 
because of such failures. The preceding sentence shall apply only with 
respect to cafeteria plans and benefits provided under cafeteria plans 
before the earlier of--
        ``(i) January 1, 1985, or
        ``(ii) the effective date of any modification to provide 
    additional benefits after February 10, 1984.
    ``(B) Special transition rule for advance election benefit banks.--
Any benefit offered under a cafeteria plan in existence on February 10, 
1984, which failed as of such date and continued to fail thereafter to 
satisfy the rules of section 105, 106, 120, or 129 under proposed 
Treasury regulations because an employee was assured of receiving (in 
cash or any other benefit) amounts available but unused for covered 
reimbursement during the year without regard to whether he incurred 
covered expenses, will not fail to be a nontaxable benefit under such 
applicable section solely because of such failure. The preceding 
sentence shall apply only with respect to benefits provided under 
cafeteria plans before the earlier of--
        ``(i) July 1, 1985, or
        ``(ii) the effective date of any modification to provide 
    additional benefits after February 10, 1984.
Except as provided in Treasury regulations, the special transition rule 
is available only for benefits with respect to which, after December 31, 
1984, contributions are fixed before the period of coverage and taxable 
cash is not available until the end of such period of coverage.
    ``(C) Plans for which substantial implementation costs were 
incurred.--For purposes of this paragraph, any plan with respect to 
which substantial implementation costs had been incurred before February 
10, 1984, shall be treated as in existence on February 10, 1984.
    ``(D) Collective bargaining agreements.--In the case of any 
cafeteria plan in existence on February 10, 1984, and maintained 
pursuant to 1 or more collective bargaining agreements between employee 
representatives and 1 or more employers, the date on which the last of 
such collective bargaining agreements terminates (determined without 
regard to any extension thereof agreed to after July 18, 1984) shall be 
substituted for `January 1, 1985' in subparagraph (A) and for `July 1, 
1985' in subparagraph (B). For purposes of the preceding sentence, any 
plan amendment made pursuant to a collective bargaining agreement 
relating to the plan which amends the plan solely to conform to any 
requirement added by this section (or any requirement in the regulations 
under section 125 of the Internal Revenue Code of 1954 [now 1986] 
proposed on May 6, 1984) shall not be treated as a termination of such 
collective bargaining agreement.
    ``(E) Special rule where contributions or reimbursements 
suspended.--For purposes of subparagraphs (A) and (B), a plan shall not 
be treated as not continuing to fail to satisfy the rules referred to in 
such subparagraphs with respect to any benefit provided in the form of a 
flexible spending arrangement merely because contributions or 
reimbursements (or both) with respect to such plan were suspended before 
January 1, 1985.''

                  Section Referred to in Other Sections

    This section is referred to in sections 79, 403, 414, 415, 3121, 
3306, 6039D, 7701 of this title; title 42 section 409.
