A cafeteria plan is a written employee benefit program that allows employees to choose at least two benefits from a menu of options. As explained by the Internal Revenue Service (IRS), a cafeteria plan must allow employees to choose between one taxable benefit (e.g. cash) and a qualified, or nontaxable, benefit (e.g. accident and health benefits). A cafeteria plan works through salary reduction agreements between the employer and the employee in which the employee agrees to give a portion of his or her salary on a pre-tax basis to pay for the qualified benefits. However, the salary reduction contributions themselves aren’t actually received by the employee. The United States Code also provides a similar definition of a cafeteria plan in Title 26 Section 125.
[Last updated in June of 2021 by the Wex Definitions Team]