Q:

What is an IRS Section 125 plan?

A:

Quick Answer

An IRS Section 125 plan is a cafeteria plan maintained by an employer for employees that allows participants to receive certain benefits on a pretax basis, according to the IRS. Participants in a cafeteria plan must be allowed to choose between at least one taxable benefit and one qualified benefit.

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Full Answer

A qualified benefit is a benefit that does not defer compensation and is excludable from an employee's gross income, as of 2015. Qualified benefits include accident and health benefits, dependent care assistance, adoption assistance, group-term life insurance coverage and health savings accounts, according to the IRS. Employer contributions to the cafeteria plan typically are made pursuant to agreements between the employer and employee in which the employee contributes a portion of his salary on a pretax basis in order to pay for the qualified benefits.

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