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Cafeteria Plan

A cafeteria plan is a welfare benefit plan specifically authorized by Section 125 of the Internal Revenue Code. Generally, employees are given a choice to "redirect" part of their salary. Each employee then uses the "redirected" part of his salary to purchase benefits from a "menu" of nontaxable benefits offered by the plan (hence the term "cafeteria"). The employer may make further contributions to the plan which employees may also use to purchase allowable benefits. Allowable benefits include dependent care programs, uninsured medical expenses not covered by the typical group medical plan, group life, medical and disability premiums otherwise paid by the employee, and contributions to 401(k) plans. Because cafeteria plans allow employees to choose the benefits they want, they are often referred to as flexible spending or flexible benefit plans.


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