3501 / What is a cafeteria plan?

A cafeteria plan (or “flexible benefit plan”) is a written plan in which all participants are employees who may choose among two or more benefits consisting of cash and “qualified benefits.” With certain limited exceptions, a cafeteria plan cannot provide for deferred compensation. See Q 3502.¹

Some cafeteria plans provide for salary reduction contributions by the employee and others provide benefits in addition to salary. In either case, the effect is to permit participants to purchase certain benefits with pre-tax dollars.

A plan may provide for automatic enrollment whereby an employee’s salary is reduced to pay for “qualified benefits” unless the employee affirmatively elects cash.²