What are Section 125 Plans primarily designed for?

Section 125 Plans, commonly known as "Cafeteria Plans," are designed to allow employees to choose among a variety of pre-tax benefits, which can reduce their taxable income. By allowing salary reduction in exchange for nontaxable benefits, such as health insurance, dependent care assistance, or other types of flexible benefits, employees can optimize their financial situation by lowering their overall tax burden.

The pre-tax contributions made by employees for these benefits come out of their gross income, thereby decreasing the amount of income that is subject to federal income tax, Social Security, and Medicare taxes. This feature makes Section 125 Plans attractive to both employers and employees, as it provides more flexibility and potential savings on taxes.

In contrast, the other options do not accurately define the purpose of Section 125 Plans. They do not focus on providing cash bonuses or retirement salary increases, nor do they aim to increase taxable income through additional benefits. Therefore, the emphasis on salary reduction for nontaxable benefits distinctly characterizes the function of Section 125 Plans.