What is a Section 125 plan (cafeteria plan)?

• A. A plan that lets employees elect pre-tax benefits
• B. A plan for after-tax deductions
• C. A retirement savings plan
• D. A reimbursement program for travel expenses

Answer: (A)

A Section 125 plan, or cafeteria plan, is a plan that lets employees choose among a menu of qualifying benefits and pay for them with pre-tax dollars through salary reductions. The key idea is that the deductions happen before taxes are calculated, which lowers the employee’s taxable income and can reduce federal income tax withholding and payroll taxes. These plans commonly include health-related benefits like medical and dental insurance, and may also offer flexible spending accounts for dependent care or medical costs. This structure is what sets Section 125 apart from after-tax deductions, retirement savings plans, or separate travel reimbursement programs, which do not operate on the pre-tax election of benefits.