Last Updated on May 11, 2026 by MyHRConcierge

Cafeteria Plans, also known as Section 125 Plans, are a flexible benefits solution that allows employees to choose between taxable cash compensation and various pre-tax benefits. These plans provide a strategic way for employers to offer valuable benefits while reducing payroll tax liabilities. This guide will explore the key components of Cafeteria Plans, including Premium-Only Plans (POP), Flexible Spending Accounts (FSA) and other essential cafeteria plan options.

What is a Cafeteria Plan?

A Cafeteria Plan is an employer-sponsored benefits plan that allows employees to select from a menu of pre-tax benefits. These plans help employees reduce taxable income while giving them flexibility in choosing benefits that best fit their needs.

Benefits of a Cafeteria Plan

• Tax Savings: Employees save on federal income taxes and FICA taxes, while employers reduce payroll taxes.
• Customizable Benefits: Employees can tailor their benefits based on personal and family needs.
• Cost-Effective for Employers: Employers can offer a competitive benefits package with minimal cost increase.

Types of Cafeteria Plans

1. Premium-Only Plan

A Premium-Only Plan (POP) is the simplest and most cost-effective type of Cafeteria Plan. It allows employees to pay for health insurance premiums with pre-tax dollars, reducing both their taxable income and employer payroll taxes.

Key Features:

• Employees contribute to medical, dental, and vision premiums on a pre-tax basis.
• Employers benefit from reduced FICA and FUTA taxes.
• Easy to administer and ideal for small businesses.

2. Flexible Spending Accounts

FSAs allow employees to set aside pre-tax dollars for eligible healthcare and dependent care expenses. FSAs provide significant tax advantages but come with certain restrictions.

Health FSA

• Covers medical, dental and vision expenses not covered by insurance.
• Contributions are “use-it-or-lose-it,” meaning unused funds may be forfeited unless the employer allows a grace period or carryover option.
• Subject to IRS contribution limits.

Dependent Care FSA

• Covers childcare, daycare, and elder care expenses.
• Contribution limits are set by the IRS and can be used only for work-related dependent care expenses.
• Helps employees balance work and family responsibilities.

3. Health Reimbursement Arrangement

A Health Reimbursement Arrangement (HRA) is an employer-funded account that reimburses employees for qualified medical expenses. Unlike FSAs and HSAs, only employers contribute to HRAs.

Key Features:

• Employers determine contribution limits and eligible expenses.
• Unused funds may roll over depending on plan design.
• Can be paired with high-deductible health plans (HDHPs) to offset costs.

4. Health Savings Account

A Health Savings Account (HSA) is a tax-advantaged account available to employees enrolled in an HDHP. Both employers and employees can contribute to HSAs.

Key Features:

• Funds roll over annually and remain with the employee even after leaving the company.
• Can be used for a variety of qualified medical expenses.
• Provides triple tax benefits: contributions are pre-tax, growth is tax-free, and withdrawals for medical expenses are tax-free.

5. Full Cafeteria Plans

A Full Cafeteria Plan offers a comprehensive range of benefits, including:

• Health Savings Accounts (HSAs) linked to High-Deductible Health Plans (HDHPs).
• Group-term life insurance.
• Adoption assistance programs.
• Disability and accident insurance.
• Employer-provided benefits credits.

These plans provide maximum flexibility but require careful administration to remain compliant with IRS regulations.

Employer Requirements for Distributing ERISA Documents

In addition to maintaining compliant SPDs and Wrap Documents- and POP documents when they are incorporated into an ERISA wrap plan structure- employers and plan administrators are responsible for properly distributing ERISA-required documents to eligible participants and beneficiaries. Under ERISA, SPDs must be furnished using methods “reasonably calculated to ensure actual receipt” and “likely to ensure actual receipt.” Due to the nature of these requirements, whether a delivery method is considered compliant will depend on the specific facts and circumstances of the employer’s workplace and workforce.

Generally, SPDs must be provided within 90 days after a participant becomes covered under the plan, within 120 days after a new plan is established, or within 30 days of a participant’s written request. Employers may also need to distribute a Summary of Material Modifications (SMM) or updated SPD when material plan changes occur. It is also important to understand that creating a Wrap Document alone does not satisfy ERISA compliance obligations if the required documents are not properly distributed to participants.

The underlying ERISA wrap plan document itself (the formal plan document) is not required to be automatically distributed to participants. Instead, it must be made available for examination and provided upon a participant’s written request, typically within 30 days, and may be subject to a reasonable copying charge unless the plan provides it at no cost.

The regulations provide several examples of acceptable methods for distributing SPDs. While handing SPDs directly to employees at the worksite is expressly permitted, the rules caution that it is not sufficient to simply place copies of the SPD in a location where participants commonly pass through or gather. In essence, the DOL expects employers to implement a process that ensures SPDs are actually delivered into participants’ hands, rather than one that depends on employees taking the initiative to retrieve them. The DOL may view distribution methods that require employees to take affirmative steps to obtain their SPDs as falling short of “full distribution,” particularly where participants may not understand the importance of obtaining the document or may miss applicable deadlines.

Electronic Distribution Requirements Under ERISA

Electronic delivery is permitted under DOL rules if employers take steps to ensure participants can access the documents and receive proper notice. Employees with regular work-related computer access may generally receive documents electronically if they are informed of their right to request a paper copy and appropriate confidentiality safeguards are in place.

For individuals without regular workplace computer access- such as COBRA participants, dependents, beneficiaries, or terminated employees- employers generally must obtain affirmative consent before sending ERISA documents electronically. Consent disclosures should explain the types of documents being provided, the right to withdraw consent, how to update contact information, and how to request paper copies.

While the DOL expanded electronic disclosure safe harbors for many retirement and pension plans in 2020, health and welfare plans generally remain subject to stricter electronic delivery standards. Employers should also remember that ERISA disclosure obligations may extend beyond SPDs and Wrap Documents- and, when applicable, POP documents included within a wrap structure- to include other required benefit notices depending on the plans offered.

On February 25, 2026, the DOL issued proposed regulations under the SECURE 2.0 Act of 2022 that would update the rules for electronic delivery of employee benefit plan disclosures, but because these changes are still in the proposal stage, they are not yet final and may be modified before taking effect.

Compliance and Regulatory Considerations

IRS Requirements

• The plan must be written, outlining the benefits and participation rules.
• Employees must be given the option to elect between taxable and non-taxable benefits.
• Must adhere to nondiscrimination rules to ensure benefits are not disproportionately favoring highly compensated employees.

Use-or-Lose Rule & Grace Period

• FSAs typically follow a “use-it-or-lose-it” rule, meaning unused funds expire at the end of the year unless a grace period (typically 2.5 months) or carryover ($640 in 2024) is permitted.

How to Implement a Cafeteria Plan?

Cafeteria Plans often provide a win-win scenario for both employers and employees. They offer tax advantages, enhance employee satisfaction and make businesses more competitive in attracting and retaining talent. Employers considering implementing a Cafeteria Plan should work with a benefit administrator, such as BenefitMall, to ensure compliance with IRS regulations and to maximize the plan’s value.

For more information on how to enhance your organization’s compliance efforts, contact MyHRConcierge at 855-538-6947 ext.108, ccooley@myhrconcierge.com. Or, schedule a convenient consultation below: