Section 125 Plan

Published: | Updated: December 23, 2017

Definition - What does Section 125 Plan mean?

The Section 125 Plan allows funds to be deducted from an employee's pre-tax income to pay for benefits, such as health insurance. These plans are regulated by the IRS and allow the employer to save on expenses while also increasing the take-home pay for employees.

It is also called the Cafeteria Plan.

Insuranceopedia explains Section 125 Plan

This plan is referred to as the Cafeteria Plan because it allows employees to choose what benefits (a minimum of two) their pre-tax income will pay for. There are several options, such as payment premiums for health insurance, dental insurance, vision care insurance, and group term life insurance. There are also exceptions. This plan cannot pay for educational assistance and medical accounts, for instance.

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