• A cafeteria plan is an employee benefit program as delineated in Section 125, subsection 1 through 7, of the IRS code. It allows employees to pay expenses such as health insurance premiums on a pre-tax basis, which reduces their total taxable income and increases their take-home income. These funds are not subject to federal, state or social security taxes.
  
  

POPs and FSAs

• Cafeteria plans are issued in two types: premium-only plans (POP) and flexible spending plans (FSA). POPs allow employers to deduct the employee's part of a company-sponsored premium from the employee's paycheck before taxes are deducted. FSAs allow employees to set aside a pre-established amount of money per year, before taxes are deducted from their paychecks, and provide the freedom to use these funds as they wish as long as they are related to medical expenses.
  
  

Section 125 Violations

• In 2007, the IRS issued new rules regarding cafeteria plans that were implemented at the beginning of 2009. It is possible for employers to violate Section 125, as well as ways to remedy it. The best way to avoid violation is to articulate the rules clearly in employees' written plan document. The new rules provide stricter standards regarding exactly what benefits can be included in a cafeteria plan. If an employer fails to comply with the written plan documentation or fails to operate a cafeteria plan in accordance with the cafeteria plan, the cafeteria plan will be included in the employees' gross income, even if the employees chose taxable benefits.
  
  

Violation Remedies

• Section 125 can also be violated in cases of discrimination against employees. As a result, the new rules provide various nondiscrimination tests to avoid any discrimination. If a highly compensated employee contributes no more than 33 percent of the total amount also contributed by other non-highly compensated employees, discrimination is most likely not happening in the company. Thus, discrimination is avoided by ensuring that all employees have the same opportunities to contribute to their plan.