Section 125 Plan

What Does Section 125 Plan Mean?

The Section 125 Plan, also known as the Cafeteria Plan, allows employees to have funds deducted from their pre-tax income to pay for benefits such as health insurance. Regulated by the IRS, this plan helps employers reduce costs while increasing employees’ take-home pay by lowering their taxable income. The pre-tax structure can also lower the net cost of coverage compared with the average cost of life insurance bought on the individual market.

Insuranceopedia Explains Section 125 Plan

The plan is called a Cafeteria Plan because it allows employees to select from a variety of benefit options (at least two) that their pre-tax income can be used to pay for. Common choices include premiums for health insurance, dental insurance, vision care insurance, and group term life insurance. However, there are exceptions—this plan cannot be used to pay for benefits like educational assistance or medical savings accounts. Employees who want more coverage than the group plan provides can buy an individual term life insurance policy on their own, though those premiums are paid with after-tax dollars.