Cafeteria Plan

A cafeteria plan, officially called a Section 125 plan, is an employer-sponsored benefits program that lets you choose from a menu of pre-tax benefit options. The name comes from the idea of picking what you want from a cafeteria line: you select the benefits that fit your situation and skip the ones you don't need.

Through a cafeteria plan, your employer offers options like health insurance, dental and vision coverage, flexible spending accounts (FSAs), dependent care accounts, disability insurance, and even additional life insurance. You choose which benefits to enroll in, and the premiums or contributions are deducted from your paycheck before taxes, reducing your taxable income.

The pre-tax advantage is the key benefit. When you pay for health insurance through a cafeteria plan, that money isn't subject to federal income tax, Social Security tax, or Medicare tax. For a family paying $500/month for their share of health premiums, the tax savings can amount to $1,500–$2,500+ per year depending on their tax bracket.

There's an important Marketplace connection: if you're offered employer coverage through a cafeteria plan, that coverage is factored into the affordability test. If the employee-only premium is below the affordability threshold, you generally won't qualify for premium tax credits on the Marketplace, even if the family coverage cost is high.

Cafeteria plan elections are typically made during your employer's annual enrollment period. Once you make your choices, you usually can't change them until the next enrollment period unless you experience a qualifying life event.