A means of having money withheld from each paycheck in order to pay for benefits such as health insurance, as well as retirement plans such as 401(k). Generally, this is applied to your gross income, thus resulting in a lower taxable income (at least in the US), so the drain on your net income is somewhat less than if you simply handed over a check for the required payments.
Perhaps someone else could provide an accurate etymology. My best guess is that it comes from the pricing scheme in a cafeteria: you pay only for what you take. For instance, not all employees would have the same level of health insurance coverage. Rather than dividing the company's total health insurance premium equally among all of the employees, each employee would only be responsible for the amount necessary for his or her actual level of coverage.