Cafeteria and 401K Plans
The treatment of Cafeteria and 401K plans for unemployment insurance reporting purposes differs from state to state. The following discussion details the treatment of each plan in Texas.
Cafeteria Plan
A Cafeteria Plan is a formal and written employee benefit plan which is offered to all participants who are employees. Participants may choose among two or more benefits consisting of cash and statutory nontaxable benefits.
Employer Contributions:
Employer contributions used to fund the following benefits are exempt from the state unemployment tax:
- Retirement.
- Sickness or accidental disability.
- Medical or hospital expenses in connection with sickness or accidental disability.
- Death.
If employer funds were used to purchase benefits not exempted by 1,2,3, or 4 above
(for example, day care, profit sharing or deferred compensation), they are taxable
and should be reported to the TWC.
Employee Contributions:
Employee contributions used to fund benefits by salary reduction or deduction from the employee's base pay would be taxable to the TWC, regardless of what they are used to purchase or provide.
401K Plan
A 401K Plan is an elective contribution and deferral to a plan containing a qualified cash or deferral compensation arrangement.
Employer Contributions:
Employer contributions into a Section 401(k) trust, which meet the requirements outlined in paragraph (a) of the Internal Revenue Code Section 401 and are exempt from income tax under Section 501(a) of the Code, are not considered taxable wages for state unemployment tax purposes.
In order to be considered exempt for state unemployment tax purposes, the employer must be able to answer yes to the following two questions:
- Does the trust meet the requirements of Section 401(a) of the Internal Revenue Code?
- Is the trust exempt under Section 501(a) of the Internal Revenue Code?
Employee Contributions:
Employee contributions from a salary reduction or deduction from the employee's base pay are taxable under Texas state unemployment tax laws.
Please e-mail questions or comments to tax@twc.state.tx.us
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