A cafeteria plan, sometimes called a section 125 plan is a written program that allows employees to choose whether to receive compensation either in the form of cash, or the employee benefits.
If it is an employee benefit, an employee typically enjoys two tax advantages:
- Employee contributions to cafeteria-plan benefits are pre-tax.
- Contributions from employers to an employee's cafeteria plan benefits aren't tax-deductible.
The benefits to employees in terms of tax reductions through making use of tax-free money to pay for benefits could be significant. For more information on section 125 cafeteria plans browse the internet.
Various types of cafeteria plans
Full Flex plans – In these plans, employers contribute for all employees who are eligible for the plan, and participants use the contributions to purchase different benefits. Employees are able to make contributions before tax to any benefit that employer's contributions don't fully pay for.
Premium-only plans (POPs) – Which permit employees to select to receive their entire salary in cash, or using the salary to pay for group insurance premiums on pretax basis.
Simple cafeteria plans – Typically offer employers with fewer than 100 employees with a secure harbor from the requirements of certain plans for nondiscrimination in exchange for contributing to every benefit plan for employees who are eligible.
Flexible spending agreements (FSAs) – Which allow employees to contribute towards health and expenses for dependent care on an income-tax basis.