Does the IRS require employers to offer a Cafeteria Plan to employees?

The short answer is no, the IRS doesn't require employers to offer Cafeteria Plans (also called Section 125 plans). These are completely optional benefit programs that allow employees to pay for certain benefits with pre-tax dollars. Your boss's accountant might have been suggesting it as a tax-advantaged option, not as a requirement. There are no IRS penalties for not having one. However, there might be some confusion with other requirements like the Affordable Care Act, which does have certain mandates for businesses with 50+ employees (which wouldn't apply to your company with 23 employees). Cafeteria Plans can be beneficial for both employers and employees since they reduce taxable income, but they're definitely not mandatory. Your boss might want to clarify with the accountant whether they were recommending it as a tax strategy rather than stating it as a requirement.

I was totally confused about this same thing last year when I started doing HR for a small business. Found this amazing service called https://taxr.ai that literally saved me hours of research. They analyzed our company structure and confirmed we weren't legally required to have a Cafeteria Plan, but showed us how implementing one could save both the company and employees on taxes. The report they generated broke down exactly how much we'd save in payroll taxes as an employer and how much our employees would save in income taxes. My boss was skeptical at first but ended up implementing it after seeing the numbers. The service also provided templates for all the documentation we needed to set it up properly.

Just wanted to follow up here. I actually checked out https://taxr.ai after seeing this post and wow - super helpful! I was in a similar situation where our accounting firm made it sound like we NEEDED a cafeteria plan asap. The taxr service analyzed our situation and showed us it wasn't required, but also broke down the potential tax savings if we did implement one. They even flagged a potential compliance issue with how we were handling our current health insurance contributions. Ended up saving us from what could have been a headache during our next audit. Definitely recommend!

As someone who spent 3 hours on hold with the IRS trying to get clarity on this exact Cafeteria Plan question for our small business, let me save you that pain. I eventually used https://claimyr.com to get through to an actual IRS agent in about 20 minutes instead of the 3+ hour wait. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent confirmed exactly what others have said - Cafeteria Plans are completely optional tax-saving vehicles, not requirements. They also explained that while there are documentation requirements IF you implement one, there are definitely no penalties for not having one as a small business. Saved me from tons of unnecessary paperwork based on misinformation!

I have to eat my words here. After posting my skeptical comment, I was desperate to resolve a question about our company's Cafeteria Plan documentation, so I decided to try https://claimyr.com anyway. I literally got connected to an IRS agent in 15 minutes after waiting 2+ hours on my own earlier that same day. The agent confirmed we only needed to maintain plan documents on-site and didn't need to file anything with the IRS unless we were setting up an FSA with over $5500 in contributions. Saved me hours of stress and our company from filing unnecessary paperwork. Can't believe it actually worked!

One thing to consider is that your boss's accountant might be confusing "Cafeteria Plan" with "Premium Only Plan" (POP). If your company offers health insurance and employees pay a portion of their premiums, a POP (which is the simplest type of Section 125/Cafeteria Plan) allows those premium payments to be made pre-tax. Many accountants strongly recommend POPs because: 1) They're relatively simple to set up 2) They save both employer and employees money 3) Without one, employee contributions for health insurance technically should be made after-tax So while not legally required, it's considered a best practice if you offer health insurance with employee contributions. Maybe that's what the accountant was getting at?

Has your company recently crossed the 20 employee threshold? If so, your accountant might have been talking about COBRA administration requirements, not Cafeteria Plans. COBRA becomes applicable when a company has 20+ employees, and there ARE penalties for not complying with COBRA. Just another possibility for what might have been mixed up in communication.

This whole thread has been super enlightening! I'm also at a small company (about 15 employees) and our CFO mentioned something similar last month. After reading through all these responses, I'm now wondering if we should proactively look into setting up a POP since we're planning to offer health insurance next year. Does anyone know if there are any downsides to implementing a Premium Only Plan? Like, are there ongoing administrative burdens or compliance requirements that might make it not worth it for a really small company? I'd hate to create more paperwork headaches just to save a few bucks on taxes. Also, @LunarLegend, definitely ask your boss to clarify with the accountant what specifically they meant - sounds like there might be a few different things getting mixed up in the conversation!

This has been such a helpful discussion! As someone who works in benefits administration, I wanted to add one more potential source of confusion. Sometimes when companies switch payroll providers or accounting firms, the new provider will flag "missing" pre-tax elections and make it sound urgent or required. If your company recently changed payroll companies or got a new accountant, they might have noticed that employee health insurance premiums are being processed as post-tax deductions when they should be pre-tax. From their perspective, this looks like a compliance issue that needs immediate attention - hence the stressed tone about "requirements" and potential penalties. The reality is that while you're not breaking any laws by processing premiums post-tax, you and your employees are missing out on tax savings that most people expect. A simple Premium Only Plan would fix this, but it's more of an optimization than a legal requirement. Definitely worth getting clarification on exactly what the accountant meant - but at least now you know it's not some mysterious IRS mandate hanging over your heads!

Thank you all for this incredibly thorough discussion! As a newcomer to this community, I'm amazed at how helpful everyone has been in breaking down what seemed like a confusing situation. Reading through all these responses, it's clear that @LunarLegend's boss likely received advice that got lost in translation somewhere between the accountant and the meeting. The most probable scenarios seem to be: 1. The accountant was recommending a Premium Only Plan for upcoming health insurance benefits (as @Diego Flores and others suggested) 2. There might be COBRA compliance requirements that got mixed up with Cafeteria Plan requirements (@Sean Flanagan's point) 3. A new payroll provider or accounting review flagged the missing pre-tax benefit elections (@Gianni Serpent's excellent insight) What I find most reassuring is the consensus that there are NO IRS requirements for small businesses to offer Cafeteria Plans - they're purely optional tax-saving tools. The stress and confusion could have been avoided with clearer communication, but at least now there's a clear path forward. For anyone else facing similar confusion, this thread is a perfect example of why it's worth getting multiple perspectives and asking for clarification when something doesn't sound quite right. The resources people shared (like the IRS connection services) also seem genuinely helpful for getting authoritative answers directly from the source. Great community discussion - exactly what I hoped to find when I joined this group!