A cafeteria plan is a plan that offers flexible benefits under the Internal Revenue Code Section 125. Employees choose their benefits from a "menu" of cash and benefits, some of which can be paid with pretax deductions from wages. The plan can provide a number of selections, including medical, accident, disability, vision, dental and group term life insurance. It can reimburse actual medical expenses or pay children’s day care expenses.
Once employees elect to shift a portion of their salaries into the plan, the election is not revocable except under specific circumstances, such as changes in marital status, number of dependents or spouse’s employment. Also, any funds unused by the end of the plan year are also not refundable and will be forfeited by the participant.
The salary dollars employees direct to a Section 125 Benefit Plan can reduce employer payroll tax costs, as those dollars are not subject to the employer Social Security contribution. In addition, lowering payroll can result in reduced federal and/or state unemployment tax contributions and workers' compensation premiums.
