JIM MATTOX 

Attorney General 

Supreme Court Building 

P. 0. Box 12546 

Austin. TX. 76711.2546 

51214752501 

Telex 9101874-1367 

Telecopier 51214750266 

714 Jackson, Suite 700 

Dallas. TX. 76202.4506 

2141742-6944 

4624 Alberta Ave., Suite 160 

El Paso, TX. 79905.2793 

9151533.3464 

r 

lW1 Texas, Suite 700 

Houston, TX. 77002-3111 

7131223-5666 

606 Broadway, Suite 312 

Lubbock, TX. 79401.3479 

6061747-5236 

4309 N. Tenth. Suite S 

McAllen, TX. 78501-1665 

512,682-4547 

200 Main Plaza, Suite 400 

San Antonio, TX. 76205.2797 

5121225-4191 

An Equal Opportunity/ 

Affirmative Action Employer 

The Attorney General of Texas 

April 11, 1984 

Monorable Carl A. Parker 

Chairman 

Senate Education Committee 

P. 0. Box 12068, Capitol Station 

Austin, Texas 78711 

Opinion No. JM-143 

Re: Whether a community college 

may establish a "cafeteria plan" 

of employee benefits in accordance with Internal Revenue Code 

section 125. 

Dear Senator Parker: 

You have asked whether a community college has authority under 

article 3.50-3 of the Insurance Code, section 130.084 of the Education 

Code, or other law to set up a "cafeteria plan" of employee benefits 

in accordance with section 125 of the Internal Revenue Code 

[hereinafter I.R.C.]. 

Section 125 of the I.R.C. provides in part: 

(a) In general. -- . . . [N]o 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. 

. . . 

(d) Cafeteria plan defined. -- For purposes of 

this section -- 

(1) In general. -- The term 'cafeteria plan' 

means a written plan under which -- 

(N all participants are employees, and 

(B) the participants may choose among two or 

more benefits. 

The benefits which may be chosen may be 

nontaxable benefits, or cash, property, or other 

taxable benefits. 

p. 615 
Honorable Carl A. Parker - Page 2 (JM-143) 

A cafeteria plan is an employee benefit plan under which an 

employee may choose between taxable compensation and 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) li 1197T.01; S. Rep. No. 1263, 95th Cong., 2d Sess. 6, 

reprinted in 1978 U.S. Code Cong. (L Ad. 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 insurance up to $50,000, I.R.C. 579, 

disability benefits, I.R.C. 5105(d), accident and 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. Taxable benefits include group%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 

under which the employer pays only for specific benefits and does not 

allow his employees to choose among alternative benefits financed by 

him. See, e.g., Attorney General Opinion H-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 Insurance Code article 3.50-3. See 

Ins. Code art. 3.50-3, 153(a)(4), (8); 4(b)(4)(D), (E), (F); Attorney 

General Opinion NW-215 (1980). A stated purpose of article 3.50-3 is 

to provide uniformity in the basic group life, 

accident, and health insurance coverages for all 

employees of Texas colleges and universities. 

Art. 3.50-3, 02(s). Moreover, community colleges must comply with 

basic coverage standards developed by the administrative council. & 

§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 establish a cafeteria plan. 

Section 11 of arti.cle 3.50-3 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 

automatic protection under a basic plan of insurance unless he waives 

basic coverage or chooses optional coverage. Id. 511. The premium 

for basic coverage must be fully paid for by the employer. Id. Thus, 

article 3.50-3 itself requires community colleges to provide one 

nontaxable benefit -- basic accident, life and health coverage funded 

p. 616 
nonorable Carl A. Parker - Page 3 (JM-143) 

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 insurance programs and coverages as it 

deems desirable for its employees. (Emphasis 

added). 

A cormnunity college may be able to construct a cafeteria plan 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 fringe benefit. 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 

another nontaxable employee fringe benefit, disability insurance, paid 

for in whole by employer contributions. See I.R.C. 5105(d). 

The Administrative Council established by Insurance Code article 

3.50-3 has issued the following regulation: "Provisions shall be 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 college may 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 cafeteria plan established by a community college must comply 

with all appl~icable requirements of section 125 of the Internal 

p. 617 
Donorable Carl A. Parker - Page 4 (JM-143) 

Revenue Code to realize the benefits of that provision. You have not 

presented a specific plan for our consideration and we express no view 

ss to how a community college might implement a plan, or the validity 

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 Internal Revenue 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/truly yod 

JIM MATTOX 

Attorney General of Texas 

TOM GREEN 

First Assistant Attorney General 

DAVID R. RICEARDS 

Executive Assistant Attorney General 

Prepared by Susan L. Garrison 

Assistant Attorney General 

APPROVED: 

OPINION COMMITTEE 

Rick Gilpin, Chairman 

Jon Bible 

David Brooks 

Susan Garrison 

Jim Moellinger 

Nancy Sutton 

Bruce Youngblood 

p. 618