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Cafeteria Plans

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What is a Cafeteria Plan?

A cafeteria plan is a type of employee benefit plan offered in the United States pursuant to Section 125 of the Internal Revenue Code. Its name comes from the earliest such plans that allowed employees to choose between different types of benefits, similar to the ability of a customer to choose among available items in a cafeteria. Qualified cafeteria plans are excluded from gross income.

To qualify, a cafeteria plan must allow employees to choose from two or more benefits consisting of cash or qualified benefit plans. The Internal Revenue Code explicitly excludes deferred compensation plans from qualifying as a cafeteria plan subject to a gross income exemption. Section 125 also provides two exceptions.

The big benefit of a cafeteria plan is a reduced tax hit. By funding the plan with pre-tax dollars, it reduces an employee’s taxable income and thus the amount they lose to taxes. (In this respect, it’s similar to a 401(k) or FSA account.) Money directed into the plan is free from federal income tax, as well as Social Security and Medicare (FICA) taxes.

Which health insurance plan should I choose?

Sometimes too much information can be overwhelming. To help you sort through it, consider these ideas:



If you have a doctor you like and trust and he or she is a primary care doctor, you may want to enroll in an HMO plan. You’ll pay very little when you need medical care.

If you prefer the freedom to choose any doctor when you are sick or injured, you may want a PPO plan.


Compare health plan BENEFITS by looking at:

  • Doctor’s Office Visit cost 

  • Hospital admission cost (per day or per admission)

  • Prescription medicine cost (generic, brand, “non-formulary” allowed)

  • Maximum Out-Of-Pocket (OPP) amount (usually this is the most you’ll pay in a calendar year if you get really sick. After the OOP maximum the insurance usually pays 100% of allowed medical costs.)


Compare health plan COSTS by looking at:

  • Monthly Premium(multiply by 12 to calculate annual premium cost)

  • Annual Deductible (add to the annual premium to determine annual cost)

  • Maximum Out-Of-Pocket (determine the most you’d pay if catastrophe struck)

  • There is an inverse relationship between benefits and costs: the higher monthly premium you pay to the insurance company, the less you pay when you obtain medical care.

  • Figure out how much you can afford to pay monthly versus the amount you’d pay if a catastrophe struck. Insurance should keep you from financial ruin.

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