Maryland Life and Health Insurance License Practice Exam

What is the purpose of the Section 125 Cafeteria Plan for employees?

1. To defer tax payments on health benefits

2. To allow flexible benefits selection

3. To increase contribution limits for HSAs

4. To provide guaranteed issue rights for health plans

The correct answer is: To allow flexible benefits selection

The purpose of a Section 125 Cafeteria Plan is indeed to allow flexible benefits selection for employees. This type of plan enables employees to choose from a variety of pre-tax benefit options that best suit their individual needs and circumstances. Each employee can tailor their benefits package by selecting the options that are most beneficial to them, which may include health insurance, dental and vision coverage, flexible spending accounts, and other types of employee benefits. This flexibility is key, as it recognizes that the needs of employees can vary widely. For example, a young employee may prioritize dental coverage over dependent care, while an employee with children may choose a plan that offers robust family health insurance options. By offering this level of customization, a Section 125 Cafeteria Plan can enhance employee satisfaction and engagement. While other options relate to important areas of taxation and insurance, they do not accurately capture the essence of what a Section 125 Cafeteria Plan provides. For instance, deferring tax payments on health benefits or increasing contribution limits for Health Savings Accounts (HSAs) have their own significant implications but do not specifically encompass the flexibility aspect that a Cafeteria Plan offers. Similarly, providing guaranteed issue rights addresses a different aspect of health insurance and does not pertain to the