Which statement BEST describes a 'Section 125 cafeteria plan'?
Explanation
A 'cafeteria' or Section 125 plan under IRC §125 is a written employer plan that gives each employee the choice between (a) cash (taxable wages) and (b) one or more qualified non-taxable benefits, including employer-sponsored health insurance, health FSAs, dependent-care FSAs, HSA contributions, group term life insurance up to $50,000, and adoption assistance. Employee elections to receive the benefit instead of cash are funded with PRE-TAX salary reduction, reducing federal income tax, Social Security, and Medicare wages (a major efficiency for both employer and employee). Strict nondiscrimination rules under §125(b) prevent the plan from favoring highly compensated employees. Option A confuses §125 with a §401(k). Option B is fabricated. Option C is the opposite of how §125 works (pre-tax, not taxable).
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