Section 125 Cafeteria Plan

HR Glossary for HR Professionals

Glossary of the most common HR terms and acronyms to assist professionals navigating the ever-growing and ever-changing world of HR terminology.

Section 125 Cafeteria Plan

What Is a Section 125 Cafeteria Plan?

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.

How Does a Section 125 Cafeteria Plan Work?

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).

What Does a Section 125 Cafeteria Plan Cover?

Cafeteria plans can cover group health, dental, vision, and term life insurance up to $50,000 as well as dependent care FSAsdisability 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.

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