What is a Section 125 cafeteria plan and why does it matter?
Last updated October 2, 2026
A Section 125 cafeteria plan (including simple premium-only plans) is the IRS-required written plan that lets employees pay premiums and contribute to FSAs pre-tax. Without an up-to-date written cafeteria plan document, those pre-tax deductions technically fail — creating tax exposure.
Any time employees pay health premiums through pre-tax payroll deductions, Section 125 of the tax code is doing the work — and it only works through a written plan adopted before the plan year begins.
The most common form is the premium-only plan (POP), which simply enables pre-tax premium payment. Fuller cafeteria plans add health FSAs, dependent care FSAs, and benefit election menus.
The compliance essentials:
- A written plan document, formally adopted and kept current with the benefits actually offered
- Election rules — annual elections, irrevocable mid-year except for permitted status changes
- Nondiscrimination testing so the plan doesn't favor highly compensated employees
Because the cafeteria plan sits outside ERISA, it's easy to forget — until an audit asks for the document behind years of pre-tax deductions.
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