Cafeteria plan

Cafeteria plan

A cafeteria plan is a type of employee benefit plan offered in the United States pursuant to Section 125 of the Internal Revenue Code. Its name comes from the earliest such plans that allowed employees to choose between different types of benefits, similar to a cafeteria.

Features and benefits

Employees of employers with cafeteria plans may obtain such benefits as health insurance, group-term life insurance, and flexible spending accounts through the plan. Though some cafeteria plans offer an explicit choice of cash or benefits, most today are operated through a "salary reduction agreement", which is a payroll deduction in all but name. Deductions under such agreements are often called pre-tax deductions. Salary reduction contributions are not actually or constructively received by the participant. Therefore, those contributions are not considered wages for federal income tax purposes. In addition, those sums generally are not subject to FICA and FUTA.

Reasons for implementing a Section 125 plan are primarily for the tax savings advantages for the employer and employee. Both parties save on taxes and therefore increase their spendable income. Employees pretax contributions are not subject to federal, state, or social security taxes. Generally employees save from $.25 to $.50 in taxes for every dollar they contribute. Employers save on the employer portion of FICA, FUTA, and Workers' Compensation premiums. It is generally thought that employers experience a renewed appreciation from their employees. The company, in effect, is giving the employee a "raise" without the cost of the raise coming from the employer.

External links

* [http://www.irs.gov/govt/fslg/article/0,,id=112720,00.html IRS: Section 125 FAQ]


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Look at other dictionaries:

  • cafeteria plan — cafeˈteria ˌplan noun [countable] HUMAN RESOURCES a system in which an employee can choose which Benefits they receive from a company, for example medical insurance or child care, up to a certain total amount of money * * * cafeteria plan UK US… …   Financial and business terms

  • cafeteria plan — n. A fringe benefit plan that allows employees to choose from a range of benefits, selecting them according to individual needs. The Essential Law Dictionary. Sphinx Publishing, An imprint of Sourcebooks, Inc. Amy Hackney Blackwell. 2008.… …   Law dictionary

  • Cafeteria Plan — An employee benefit plan that allows staff to choose from a variety of benefits to formulate a plan that best suits their needs. Cafeteria plan options may include health and accident insurance, cash benefits, tax advantages and/or retirement… …   Investment dictionary

  • cafeteria plan —  Benefit package that allows employee choice.  ► “Since image is everything these days, someone came up with the idea of using the term ‘cafeteria plan’ to describe a new way to sell employees on a substantially reduced benefits program.”… …   American business jargon

  • cafeteria plan — cafeter′ia plan n. a fringe benefit plan under which employees may choose from among various benefits those that best fit their needs up to a specified dollar value • Etymology: 1985–90 …   From formal English to slang

  • cafeteria plan — a fringe benefit plan under which employees may choose from among various benefits those that best fit their needs up to a specified dollar value. [1985 90] * * * …   Universalium

  • cafeteria plan — Type of fringe benefit plan whereby employee, in addition to receiving certain basic fringe benefits, is permitted to also select and structure certain other types of benefits up to a specified dollar amount …   Black's law dictionary

  • cafeteria plan — Type of fringe benefit plan whereby employee, in addition to receiving certain basic fringe benefits, is permitted to also select and structure certain other types of benefits up to a specified dollar amount …   Black's law dictionary

  • cafeteria plan — a fringe benefit plan under which employees may choose from among various benefits those that best fit their needs up to a specified dollar value. [1985 90] …   Useful english dictionary

  • cafeteria plan — In the USA, an agreement that permits employees to select a fringe benefit from a variety of such benefits (including cash); under the tax code, the benefit is not included in the gross income of the participants solely because the participants… …   Accounting dictionary

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