Cafeteria Plan Law and Legal Definition
A cafeteria plan is a plan that offers flexible benefits under the Internal Revenue Code Section 125. Employees choose their benefits from a menu of cash and benefits, some of which can be paid with pre-tax deductions from wages. The plan can provide several selections, including medical, accident, disability, vision, dental, and group term life insurance. It can reimburse actual medical expenses or pay children’s daycare expenses.
Once employees elect to shift a portion of their gross salaries as a pre-tax benefit into the plan, the election is not revocable for one year except under specific circumstances, such as changes in marital status, number of dependents, or spouse’s employment.
The salary dollars employees direct to a Section 125 Benefit Plan can reduce employer payroll tax costs, as those dollars are not subject to the employer’s Social Security contribution. Besides, lowering payroll can reduce federal and state unemployment tax contributions and workers’ compensation premiums.
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Puerto Rico is one of the Territories Approved under the US Congress.