Which statement about a Section 125 cafeteria plan is true?

• A. It has no IRS requirements
• B. It increases federal taxable wages
• C. It is a plan to elect pre-tax benefits
• D. It eliminates health insurance eligibility

Answer: (C)

A Section 125 cafeteria plan is a way for employees to elect benefits on a pre-tax basis. When you enroll in benefits under this plan, the contributions or premiums are deducted from your gross pay before taxes are calculated, which lowers your federal income tax withholding (and typically reduces FICA taxes as well). That pre-tax treatment is what the plan is designed to accomplish. The plan must be written and run according to IRS rules, with approved eligible benefits and approved times to change elections (usually once a year, plus life-event changes). Because of these requirements and the tax-advantaged structure, the statement that best describes the plan is that it’s a way to elect pre-tax benefits. The other options conflict with how Section 125 plans work: they do involve IRS requirements, they don’t increase taxable wages, and they don’t eliminate health insurance eligibility.