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A cafeteria plan - also known as a Section 125 plan, after the portion of the IRS code that regulates the plans - lets employees redirect part of their salaries and wages to pay for certain benefits.
A cafeteria plan or cafeteria system is a type of employee benefit plan offered in the United States pursuant to Section 125 of the Internal Revenue Code. [1] Its name comes from the earliest versions of such plans, which allowed employees to choose between different types of benefits, similar to the ability of a customer to choose among available items in a cafeteria.
The "free" money is not taxable because the IRS views these plans as health insurance plans for tax purposes. [21] According to IRS section 125, benefits received from a health insurance plan are not considered taxable income. [citation needed]
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The surcharge is applied when an employer does not arrange for a pre-tax payroll deduction system for health insurance (a Section 125 plan, or a "cafeteria plan"), and has employees who receive care that is paid from the uncompensated care pool, renamed in October 2007 as the Health Safety Net. [30]
Allows employers to provide incentives (like payments or gift cards) to employees to join a plan; Changes coverage requirements for part-time employees [9] Allows Tax-Free Rollovers of 529s to ROTH IRAs under certain circumstances; Creates several exemptions for early withdrawals, including Withdrawals for emergencies; Withdrawals by domestic ...
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If an employer makes deposits to such a plan on behalf of its employees, all employees must be treated equally, which is known as the non-discrimination rules. If contributions are made by a Section 125 plan, nondiscrimination rules do not apply. Employers may treat full-time and part-time employees differently, and employers may treat ...