What is a Cafeteria Plan?


cafeteria plan

is an employee benefit plan which is part of Section 125 of the IRS code. It can often also be referred to as a Section 125 Plan. The name cafeteria plan comes from the idea that employees can choose between different benefits the way you would choose your food in a cafeteria. Any qualified cafeteria plan is excluded from gross income for tax purposes. For a cafeteria plan to qualify for tax exemption employees must be allowed to choose from two or more cash or benefit plans. IRS Code does not allow deferred compensation plans as an exemption that is part of a cafeteria plan.

If a cafeteria plan discriminates in favor of higher compensated employees then those compensated employees are required to disclose the benefits as earned income on taxes. Additionally if the benefits exceed 25% of the benefits provided to all employees, then those who exceed the 25% must report the benefits as income. Cafeteria benefits came about due to the conclusion that a universal benefit program can not support all employees.

Cafeteria Plan history

The concept was originated by Thomas E. Wood of Hewitt Associates. Wood created a detailed framework of the concept which is still the basis of current cafeteria plans today. The Cafeteria Plan was later added to the IRS Code in November 1978. It is part of the IRS Code Section 125 which sets requirements and tax treatment for cafeteria plans.

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