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It's taxable under FICA and FUTA because it would be FICA and FUTA wages in the absence of the cafeteria plan. FICA - IRS Code Section 3121(a)(5)(G): (G) under a cafeteria plan (within the meaning of section 125) if such payment would not be treated as wages without regard to such plan and it is reasonable to believe that (if section 125 applied for purposes of this section) section 125 would not treat any wages as constructively received FUTA - IRS Code Section 3306(b)(5)(G): (G) under a cafeteria plan (within the meaning of section 125) if such payment would not be treated as wages without regard to such plan and it is reasonable to believe that (if section 125 applied for purposes of this section) section 125 would not treat any wages as constructively received EDIT: note that these code sections are cited in that pdf on page 7, item H