A cafeteria plan provides employees with a minimum of one taxable and one qualified benefit on a pretax basis. These plans allow employees to choose which options they prefer, with the employer providing the same total amount of benefits to each employee.
An example of a taxable benefit is cash, and examples of qualified benefits include life insurance, health savings accounts, adoption assistance and reimbursement for childcare expenses. Qualified benefits do not include gross income.
Specific requirements for these plans are provided in section 125 of the Internal Revenue Code. This section indicates that allowable expenses must occur within the plan year, as there are no cumulative benefits.