APA Certified Payroll Professional (CPP) Practice Exam 2025 – All-in-One Resource to Ensure Your Exam Success!

Cafeteria plan contributions are generally exempt from certain payroll taxes, which includes Social Security (SS), Medicare (Medi), Federal Income Tax (FIT), and Federal Unemployment Tax Act (FUTA) taxes. The premise behind cafeteria plans is that employees can choose their benefits from a set of options, which often allows them to allocate pre-tax dollars for those benefits like health insurance or dependent care.

The exempt status from FIT allows employees to reduce their taxable income, thereby minimizing their overall tax liability. Additionally, by being exempt from SS and Medi taxes, employees enjoy the benefit of contributing less to these federal programs, effectively enhancing their take-home pay. However, it’s essential to note that some components of cafeteria plans may still be subject to state income tax (SIT), but the federal taxes mentioned (FIT and FUTA) offer a broader tax relief for the plan contributions.

Thus, the correct answer highlights that cafeteria plan contributions are exempt from the most significant federal payroll taxes, which can provide significant savings for employees participating in such plans.