A cafeteria plan is a plan maintained by an employer for employees that meets the specific requirements and regulations of Section 125 of the Internal Revenue Code. It provides participants an opportunity to receive certain benefits on a pre-tax basis.
Section 125 plans, also called Premium Only Plans (POP), reduces taxable income for employers and employees by allowing them to pay their portion of medical insurance premiums and HSA contributions using pre-tax or tax-free dollars. An employer must have a signed, effective Section 125 plan document to legally take pre-tax deductions.
Premiums for enrollees can only be taken on a pre-tax basis under a Section 125 plan.