                                The Attorney         General of Texas
                                                  September 12, 1986
JIM MAlTOX
Attorney General



Supreme Court Buildin          Mr. Lawrence K. Peti:J:t                Opinion No. m-543
P. 0. BOX 12548
Austin, TX. 7871% 2548
                               Chancellor
51214752501
                               University System o:iSouth Texas        Re: Whether a state university
Telex 91OlS7+13S7              P. 0. Box 1238                          may establish a "cafeteria plan"
Telecopier  512/475-0288       Kingsville, Texas 'W363                 under section 125 of the Internal
                                                                       Revenue Code
714 Jackson. Suite 700
Dallas, TX. 75202.4508         Dear Mr. Pettit:
2141742-8944
                                    You ask whether  the University System of South Texas may esta-
                               blish an employee benefit plan of the type described as a "cafeteria
4824 Alberta Ave., Suite IS0
El Paso, TX. 79905-2793
                               plan" in sectidn 125 of the Internal Revenue Code. Attorney General
91515353484                    Opinion JM-143 (13!34) determined that a community college had
                               authority under article 3.50-3 of the Insurance Code to establish a
                               "cafeteria plan" consisting of various taxable and nontaxable fringe
)41   Texas. Suite 700         benefits in the area of life, accident and health, and disability
     ston, TX. 77002.3111
                               insurance. Since state universities are also authorized .to contract
713l223aSS
                               for insurance coverape under article 3.50-3 of the Insurance Code, see
                               Attorney General 0p:hion MW-215 (1980). you believe that the reason=
908 Broadway, Suite 312        and result of Attorney General Opinion JM-143 will apply to the
Lubbock, TX. 79401.3479        University System ojjSouth Texas. Section 125 of the Internal Revenue
SW747-5233
                               Code (I.R.C.) has, however, been amended since Attorney General
                               Opinion .JM-143was :Lssued. See Deficit Reduction Act of 1984, Pub. L.
4309 N. Tenth, Suite S         No. 98-369, 5531(b)(l), (4)(A). 98 Stat. 881 (1984). Your question
McAllen, TX. 78501.1885        must be addressed in relation to the present version of section 125.
5121682.4547

                                    A "cafeteria plan" as defined by section 125 of the .Internal
200 Main Plaza, Suite 400      Revenue Code is an employee benefit plan which offers employees a
San Antonio, TX. 7S.2052797    choice between cash and nontaxable fringe benefits. I.R.C. 5125(d);
512l225-4191                   26 C.F.R. 91.125-21. If the statutory conditions are met, the non-
                               taxable benefits m&y be excluded from gross income even though the
                               employee has receil,ed them in lieu of cash compensation. Id. See
An Equal Opportunity/
Affirmative Action Employer
                               also H.R. Rep. No, 432, pt. II, 98th Gong.. 2d Sew.., 1608-T
                               Ginted    in 1984 U.S. Code Cong. & Ad. News 698, 1232-33. Section
                               125 of the code sta1:esin part:

                                        (a) In general. Except as provided in subsection
                                        (b), no mount shall be included in the gross
                                        income of a participant in a cafeteria plan solely
                                        because, under the plan, the participant may
                                        choose amtmg the benefits of the plan.


                                                       p. 2500
Mr. Lawrence K. Pettit - Pai:e2      (JM-543)




          (b) [Exception where plan discriminates in favor
          of   highly compensated individuals and      key
          employees]. .

          (c)    [Discriminatjon further defined].

          (d) Cafeteria plzz~defined. For purposes of this
          section --

            (1) In genera,l. The term 'cafeteria plan'
         means a written p1.s.n
                              under which --

                      (N   all Participants are employees, and

                      (B) &e;articipants     may choose among 2
                      or more benefits consisting of cash and
                      statutory ziontaxablebenefits.

                (2)   [Deferred c:ompensationplans excluded].

          (e) [Highly compensated participant and indivi-
          dual defined].

          (f) Statutory nontaxable benefits defined. For
          purposes of this section, the term 'statutory non-
          tamable benefit' means any benefit which, with the
          application of subsection (a) is not includible in
          the gross income of the employee by reason of an
          express provision of this chapter [26 U.S.C.S. 551
          et seq.] (other than section 117. 124, 127, or 132
          [26 U.S.C.S. 8117, 124, 127, or 1321). Such term
          includes any grocp term life insurance which is
          includible in groosiincome only because it exceeds
          the dollar limita'ion of section 79 [26 U.S.C.S.
          -1.
          (h)     [reporting and recordkeeping requirements].

          (I)     [regulations:,. (Emphasis added).

I.R.C. 1125. Amendments of particular significance to your question
are underlined.

     As the "cafeteria plan" Is now defined, it must offer employees a
choice between cash compensation and certain nontaxable fringe
benefits I.R.C. 9125(d)(l); 26 C.F.R. 91.125-21; H.R. Rep. No. 432,
Pt. II, 98th Cong., 2d Ser.s., 1608-09. reprinted in 1984 U.S. Code
Cong. 6 Ad. News 698, 1232-X; H.R. Conf. Rep. No. 861, 98th Gong.. 2d
Sess., 1173-74, reprinted :LI!1984 U.S. Code Cong. 6 Ad. News 1445,




                               p. 2501
Mr. Lawrence K. Pettit - Pag;e3   (JM-543)




1861-62. Moreover, options:l insurance coverage* in an amount in
excess of $50,000, usually includible in gross income, is treated as a
nontaxable benefit when offxed in a cafeteria plan. I.R.C. 5125(f);
see I.R.C. 579.
-
     The Internal Revenue Sezvice has issued a temporary regulation on
cafeteria plans. According to information published by IRS in the
Federal Register, taxpayer;3 may rely on this temporary regulation
pending the issuance of final regulations, but it is not intended to
address all issues raised by the amendments to section 125 of the
Internal Revenue Code. 51 Fed. Reg. 4318 (1986). The temporary
regulation on cafeteria plans states in part:

                                  plan years beginning on or
         Generally, for caflzl:eria
         after January 1, lW5, a cafeteria plan is a written
         plan under which Farticipants may choose among two
         or more benefits consisting of cash and certain
         other permissible ‘benefits. . . a cafeteria plan
         may offer participants the opportunity to purchase,
         with after-tax exrployee contributions, coverage
         under a group-term?.ife insurance plan (section 79),
         coverage under .an accident or health plan (section
         105(e)), coverage under a qualified group legal
         services plan (section 120). or coverage under a
         dependent care assistance program (section 129).
         (Emphasis added).

     The cafeteria plan described in Attorney General Opinion J'M-143
(1984) allowed employees fo choose between taxable and nontaxable
benefits. Under present Law, the cafeteria plan must offer the
employee a choice between cafihand certain nontaxable benefits. Under
the quoted regulations, an employee's participation in a nontaxable
benefit offered in a cafeteria plan may be funded by a salary deduc-
tion. 26 C.F.R. §1.125-2T; .-
                            :see 10 Thurgood Marshall L. Rev. 522, 532
(1985).

     Article 3.50-3 of the Insurance Code requires state universities
to provide basic life, act::ident.and health insurance coverage to
employees. Ins. Code art. X.50-3, §§2(a)(b). 11. Standards for basic
coverage are developed by an administrative council established under
section 4 of the statute. Section 11 of article 3.50-3 provides that
each active full-time employee shall be automatically protected by a
basic plan of insurance coverage, unless he waives basic coverage or
chooses optional coverage. Section 11 makes the following provision
for premium payments:

         If the cost of an active employee's basic coverage
         'exceeds the amount:appropriated by the legislature
         for an employee, the institution must provide




                              p. 2502
Mr. Lawrence K. Pettit - Pale 4   (J-M-543)




          optional coverage at no cost to the employee. If
          the employee chooses basic coverage rather thz
          optional coverage,-the
                            ,L   institution may deduct from
          the monthly comp~w~sation of the employee up to
          one-half the amow::  that exceeds the state's con-
          tribution for an-employee, and the institution
          shall pay the dif&ence.    . . . (Emphasis added).

Thus, it is possible that basic coverage may be partially funded by a
deduction from the employee's salary. See also Ins. Code art. 3.50-3.
5312, 17.

     Article 3;50-3 of t'va Insurance Code also authorizes the
governing board of a state university to "provide such additional or
optional insurance programs and coverages as it deems desirable for
its employees." Ins. Code art. 3.50-3, 54(b)(4)(F). The Administra-
tive Council has issued the following regulation: "Provisions shall
be made for the payroll deduction for premiums of the optional
coverage." 19 T.A.C. 625.3o(:c).

     The governing body of a university may use its authority under
section 4(b)(4)(F) of article 3.50-3 and rule 19 T.A.C. section
25.34(c) to offer employees

          the opportunity to purchase, with after-tax
          employee contributions, coverage under a group-
          term life insurance plan (section 79). totI
          coverage under an accident or health plan (section
          105(e)). . . .

26 C.F.R. 51.125-2T.

     You have not inquired about authority to include group legal
services or dependent care assistant payments in a cafeteria plan. We
do not address this question; however, we note that the governing body
of a university may not make a deduction from the compensation of an
employee paid from state fllndsunless the deduction is authorized by
law. -See V.T.C.S. art. 6813e.

     You have not submitted a plan to us and we express no opinion as
to the details of such a plan. A cafeteria plan must comply with the
relevant code provisions and regulations. We also point out that 26
C.F.R. section 1.125-2T is a temporary regulation and that Congress is
at present engaged in a mejo,r revision of the Internal Revenue Code.
See U.S. Code Cong. & Ad. Norrs,August 1986. Attorney General Opinion
z143   (1984) does not describe cafeteria plans as limited by present
law and should be disregarded.




                              p. 2503
.
    Mr. Lawrence K. Pettit - Page 5    (JM-543)




                                  SUMMARY

                 The University System of South Texas has
              authority under ac,ticle 3.50-3 of the Insurance
              Code to establish an employee benefit plan whereby
              employees are offered an opportunity to purchase
              with after-tax errployee contributions coverage
              under a group-te:zm life insurance plan or an
              accident or health .plan. This plan may qualify as
              a "cafeteria plan'" under section 125 of the
              Insurance Code if a.11other conditions imposed by
              federal law and regulation are implemented.
              Attorney General Dpinion JM-143 (1984) does not
              describe "cafeteri.aplans" as they now exist and
              should be disregarded.




                                             Attorney General of Texas

    JACK HIGHTOWER
    First Assistant Attorney General

    MARY KELLER
    Executive Assistant Attorney General

    RICK GILPIN
    Chairman, Opinion Committee

    Prepared by Susan L. Garriscn
    Assistant Attorney General




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