Definition: An employee benefit arrangement allowed by IRS Code Section 125, under which employees are allowed to pay for certain employee benefits on a pre-tax rather than an after-tax basis. .
Cafeteria plans, also known as Section 125 plans (because of the section of the IRS code that covers them), and flexible spending plans allow employees to use pretax dollars to choose among different types of benefits. Cafeteria plans typically have core benefits such as medical and life insurance, sick leave and sometimes disability benefits. Option benefits may include anything from dental insurance and elder care to vision coverage. They can't, however, include transportation assistance, tuition assistance or, unless part of a 401(k) plan, retirement benefits.