A cafeteria plan gives employees the option to set aside part of their compensation as pre-tax contributions toward health insurance and other benefits. Cafeteria plans are often called Section 125 plans—a reference to the part of the Internal Revenue Code that outlines how such plans may operate.

Cafeteria plans offer tax savings for both employees and employers. An employee’s taxable income—or gross pay—is reduced, and an employer’s contributions to benefits are not taxed.

Most cafeteria plans are premium-only plans (POPs), meaning that pre-tax contributions go toward policy premiums. Still, there are other types of Section 125 arrangements, including simple cafeteria plans, full flex plans, and flexible spending accounts (FSAs).

Cafeteria plans can cover group health, dental, vision, and term life insurance up to $50,000 as well as dependent care FSAs, disability insurance, and adoption assistance. However, according to the IRS, a cafeteria plan cannot include Archer MSAs, athletic facilities, educational assistance, meals, or commuter benefits—though commuter benefits can complement a cafeteria plan.

Related Terms: Health Savings Account (HSA)