Definition: An employee benefit arrangement allowed by IRS Code Section 125,
under which employees are allowed to pay for certain employee
benefits on a pre-tax rather than an after-tax basis.
Cafeteria plans, also known as Section 125 plans (because of the
section of the IRS code that covers them), and flexible spending
plans allow employees to use pretax dollars to choose among
different types of benefits. Cafeteria plans typically have core
benefits such as medical and life insurance, sick leave and
sometimes disability benefits. Option benefits may include anything
from dental insurance and elder care to vision coverage. They
can't, however, include transportation assistance, tuition
assistance or, unless part of a 401(k) plan, retirement benefits.