JIM MATTOX Attorney General

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# The Attorney General of Texas April 11, 1984

Monorable CarlA. Parker Chairman Senate EducationCommittee P. 0. Box 12068,Capitol Station Austin, Texas 78711 OpinionNo. JM-143
Re: Whether a community college may establisha "cafeteriaplan" of employee benefits in accordancewith InternalRevenue Code section 125.
Dear Senator Parker:
You have asked whether a community college has authority under article 3.50-3 of the InsuranceCode, section 130.084of the Education Code, or other law to set up a "cafeteriaplan" of employee benefits in accordance with section 125 of the Internal Revenue Code [hereinafterI.R.C.]. Section 125 of the I.R.C.provides inpart:

(a) In general. -- . . . [N]o amount shall be included in thegross incomeof a participant in a cafeteriaplan solelybecause,under the plan, the participantmay choose among the benefits of the plan.

. . . (d) Cafeteriaplan defined. -- For purposes of this section -- (1) In general. -- The term 'cafeteriaplan' means a written plan underwhich -- (N all participantsare employees,and (B) the participantsmay choose among two or more benefits. The benefits which may be chosen may be nontaxable benefits, or cash, property, or other taxablebenefits.

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A cafeteria plan is an employee benefit plan under which an employee may choose between taxable compensationand one or more tax exempt fringe benefits, such as accident and health insurance, financed by the employer's contribution. [1984] 2 Stand. Fed. Tax w (CCH) li1197T.01; S. Rep. No. 1263, 95th Cong., 2d Sess. 6, reprinted in 1978 U.S. Code Cong. (LAd. News 6761, 6771. 6838. Although the cafeteria plan effectively permits the employee to convert taxable cash compensation into nontaxable fringe benefits, section 125 of the code maintains the tax exempt status of those fringe benefits. Nontaxable employee benefits paid for by the employer include group term life insuranceup to $50,000, I.R.C. 579, disabilitybenefits, I.R.C. 5105(d),accidentand health plans, I.R.C. 5106, group legal services plans, I.R.C. 5120, and dependent care assistance payments, I.R.C. $129. See S. Rep. No. 1263, supra, at 6838. Taxablebenefits includegroup%rm life insurance in excess of $50,000 as well as cash, property, or other tangible compensation. Id. at 6837. - The essential feature of a cafeteria plan is that the employee may choose between taxable and nontaxable benefits provided at the employer's expense. A cafeteria plan is more flexible than a plan underwhich the employerpays only for specificbenefits and does not allow his employees to choose among alternativebenefits financedby him. See, e.g.,Attorney GeneralOpinionH-859 (1976). With this background in mind, we will consider whether a community college may establish a cafeteria plan for its employees. Community colleges are subject to InsuranceCode article 3.50-3. See Ins. Code art. 3.50-3, 153(a)(4), (8); 4(b)(4)(D), (E), (F);Attorney GeneralOpinionNW-215 (1980). A statedpurpose of article 3.50-3 is

to provide uniformity in the basic group life, accident, and health insurance coverages for all employeesof Texas collegesand universities.
Art. 3.50-3, 02(s). Moreover, community colleges must comply with basic coverage standardsdevelopedby the administrativecouncil. & §4@)(4)(A), CD). Once the college provides a basic coverage plan that complies with article 3.50-3, it may be able to add enough optional elements to establisha cafeteriaplan. Section 11 of arti.cle3.50-3 provides that no eligible employee may be denied any of the coverages provided by this act unless he waives them in writing. Each full tine employee is entitled to automaticprotectionunder a basic plan of insuranceunless he waives basic coverage or chooses optional coverage. Id. 511. The premium for basic coveragemust be fullypaid for by the employer. Id. Thus, article 3.50-3 itself requires community colleges to provide one nontaxablebenefit -- basic accident, life and health coverage funded

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at the employer's expense. See 19 T.A.C. 525.33 (Basic Coverage Standards). Sectfon 4(b)(4)(F)provides in part: All contracts for basic coverages negotiated from the effective date of this Act shall be in compl~isnce

with basic coverage standards
. . . . Each governing board may provide such additional or optional insuranceprograms and coveragesas it deems desirable for its employees. (Emphasis added).
A cormnunity

collegemay be able to constructa cafeteriaplan by using its power to provide additional or optional coverages. For example, it could provide, at its expense, optional life insurance coverage in an amount in excess of $50,000, a taxable fringebenefit. See I.R.C. $%79, 125. It may also be able to provide at its expense other nontaxable fringe benefits in the form of health and accident insurance. See I.R.C. 0106. Article 3.50-2, section 5(a) and article 3.51 of theInsurance Code authorize a community college to provide anothernontaxable employee fringebenefit, disability insurance,paid for inwhole by employer contributions. See I.R.C. 5105(d). The AdministrativeCouncil establishedby Insurance Code article 3.50-3has issued the followingregulation: "Provisionsshallbe made for the payroll deduction for premiums of the optional coverage." 19 T.A.C. 825.34(c). In our opinion, this regulation does not require that the employee pay premiums for optional coverage. It merely requires that the college arrange for payroll deduction of premiums for which the employee is responsible. See also Ins. Code art. 3.51 (express authority for public employer to pay entire premium for employees'health, accident.and disability insurance).
We believe articles 3.50-3 and 3.51 of the Insurance Code authorize community colleges to establish a "cafeteria plan" consisting of a choice of fringe benefjts in the area of life, accident and health. and dissbility insurance. Though the range of benefits is narrow, section 125 of the Internal Revenue Code only requires that the participants be able to choose among "two or more benefits." You have not j~nquired whether a junjor collegemay provide such nontaxable benefits ss group legal services or dependent care assistance payments. We therefore do not address this question, except to say that a community college may not grant these employee benefits unless it has express or implied statutory authority to do
**SO.** Any cafeteriaplan establishedby a communitycollegemust comply with all appl~icablerequirements of section 125 of the Internal

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Revenue Code to realize the benefits of that provision. You have not presenteda specificplan for our considerationandwe expressno view ss to how a community collegemight implement a plan, or thevalidity of =v such plan under federal law. If a community college establishes a cafeteria plan and it wishes to know whether participants in the plan qualify for the favorable tax treatment accorded by section 125 of the code, it should seek a Revenue Ruling from the InternalRevenue Service.
SUMMARY
A community college may set up a "cafeteria plan" for its employees consisting of a selection of taxable and nontaxable fringe benefits in the area of life, accident and health, and disability insurance.
Very/trulyyod

JIM MATTOX Attorney General of Texas TOM GREEN FirstAssistantAttorneyGeneral
DAVID R. RICEARDS ExecutiveAssistantAttorneyGeneral Preparedby SusanL. Garrison AssistantAttorneyGeneral
APPROVED: OPINION COMMITTEE Rick Gilpin, Chairman Jon Bible David Brooks SusanGarrison JimMoellinger Nancy Sutton BruceYoungblood

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