Cafeteria Plan

A cafeteria plan is a type of employee benefit plan offered in the United States pursuant to Section 125 of the Internal Revenue Code. Its name come from the earliest such plans that allowed employees to choose between different types of benefits, similar to a cafeteria. Employers who are offered such plan may obtain following typical benefits:

1. Health, medical, accident, disability, vision or dental insurance
2. Group-term life insurance
3. Flexible spending accounts (FSA) through the plan (i.e., medical expense FSA and dependent care FSA)
4. Adoption assistance
5. Health savings account (HSA)

Reasons for implementing a Section 125 plan are primarily for the tax savings advantages for the employer and employee. Employees’ pretax contribution is not subject to federal, state, or social security taxes. Generally employees save from $0.25 to $0.50 in taxes for every dollar they contribute. Employers save on the employer portion of FICA, FUTA, and Workers’ Compensation premiums.