Question

Which of the following plans BEST describes a cafeteria plan under Section 125 of the IRC?

A. A quantified and accountable expense reimbursement plan
B. A tax-qualified retirement plan which meets special needs
C. A plan which permits EEs to select from two or more qualified taxable and nontaxable benefits
D. A plan whereby EEs may request that pretax dollars be set aside in a qualified retirement account until age 59

Answer 1

A cafeteria plan under Section 125 is best described as a plan which permits employees to select from a variety of qualified taxable and nontaxable benefits. These are not retirement specific but provide flexible benefits such as health insurance using pretax dollars.

Step-by-step explanation:

The plan that best describes a cafeteria plan under Section 125 of the IRC is C. A plan which permits employees to select from two or more qualified taxable and nontaxable benefits. Unlike defined contribution plans or pensions, cafeteria plans under Section 125 allow employees to choose from a variety of benefits, which can include pretax group health insurance, dental insurance, vision care, and other selected perks. These selections can be funded with employee salary reductions which are not subject to federal, state, or social security taxes.

While a 401(k) is a common type of defined contribution plan where an employer and employee can make contributions to a retirement account, it is different from a cafeteria plan in that the primary function of a 401(k) is to serve as a retirement savings vehicle, rather than providing flexible benefit options. Section 125 cafeteria plans don't specifically concern retirement savings but rather address a wider array of immediate employee benefits that can be customized to the individual's needs.