What is a Cafeteria Plan?

A cafeteria plan, also called a 'tax-advantaged benefits plan', is a type of employee-benefit program recognized by section 125 of the Internal Revenue Code.

How Does a Cafeteria Plan Work?

Let's assume Company XYZ employs 100 people and would like to start offering health insurance. It contacts an insurer and opens a cafeteria plan. The plan allows employees to buy medical, dental and vision insurance on a pretax basis. Through the plan, the company also decides to offer adoption assistance and group term-life insurance. A flexible spending arrangement (FSA) is also a common cafeteria plan benefit.

Company XYZ contributes money to the cafeteria plan by taking deductions from employees' salaries (those who participate in the plan). Those deductions are not subject to FICA or unemployment taxes.

A cafeteria plan, by name, allows employees to choose which benefits they want from the plan. It must have a written document that explains who is eligible to participate.

Why Does a Cafeteria Plan Matter?

Cafeteria plans allow employees to purchase benefits with money that has not been taxed. This saves a considerable amount of money and helps employers retain talent.

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

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