Who is eligible to participate in a cafeteria plan?

Participation in a cafeteria/flex plan must be limited to employees. For this purpose, the term employees includes current and former employees of the employer (although a cafeteria plan cannot be established mainly for former employees). The term employee includes common law employees, leased employees and full-time insurance salespersons. However, self-employed individuals are not treated as employees; thus, sole proprietors, partners, directors of corporations and 2-percent shareholders of an S corporation are not employees and may not participate in a cafeteria plan.

Spouses and beneficiaries. However, a cafeteria plan may provide benefits for spouses and beneficiaries of participants. Although the spouse of a participating employee may not actively participate in a cafeteria plan (for example, a spouse may not be given the opportunity to select or purchase benefits offered by the plan), the spouse may benefit from the employee's selection of family medical insurance coverage under the plan.

Upon the death of a participant, the surviving spouse may be given the right to select among various settlement options with regard to a death benefit selected by the employee. A surviving spouse is not considered to be actively participating in the plan simply because he or she has such a right of selection or election after the employee's death.

Years of employment requirement. No employee can be required to complete more than three years of employment with the employer maintaining the plan in order to be eligible for participation in the cafeteria plan. This participation standard is based on years of employment and not on years or hours of service. The employment requirement must be the same for each employee.

Once an employee has satisfied the employment requirement, the employee must be permitted to participate in the cafeteria plan no later than the first day of the first plan year beginning after the date the employment requirement was met. This plan entry requirement does not apply if the employee was separated from service before the first day of that plan year.