A cafeteria plan is an employer-sponsored plan that allows employees to contribute pre-tax dollars to an account that they can use to cover qualified benefit expenses, such as insurance premiums, medical expenses, and dependent daycare costs. Also known as a “Section 125 plan,” named after IRS code Section 125.

Cafeteria plans reduce an employee’s gross income because the amounts are put into an account before taxes are taken out of the paycheck, so they can save on federal income taxes later. Also reduces the amount employer’s owe in FICA taxes because the employee technically has a lower salary, so they owe less FICA (Medicare and Social Security) taxes.

Cafeteria plans are also referred to as a Flexible Spending Account (FSA) or a Premium Only Plan (POP). There are limitations to the amount employees can contribute to these plans each year. Typically, the amounts do not rollover from year-to-year, so employees must use the money in their account by the end of their plan year. Some employers or plans offer grace periods that allow employees some extra time to use the funds or allow a set amount that can be carried over into the following year.

You can find more information via the IRS.