At a Christmas party at Pendant Publishing, Jerry and George meet Elaine's coworker boyfriend Dick, who is a recovering alcoholic. Jerry insists that his backwards use of "on" and "off the wagon" is correct. Elaine brings George to her boss to fill an opening for a publisher's reader. Despite knowing no literature, George fakes expertise by inventing a Beatnik poet called "Art Vandelay". Meanwhile, with Jerry failing to hold on to Elaine's alcoholic drink, Dick confuses it for his own. Elaine fears that Dick will relapse as a result.
George gets hired, and is obligated to thank Elaine with a Christmas gift. Finding a luxurious cashmere wool sweater on deep discount, he is shown that it bears a manufacturing defect—a small red dot—but decides to feign ignorance. Unable to smell drink on Dick's breath, Elaine cajoles Kramer into drinking strong Scotch as a breath test. Elaine is bowled over by the apparent generosity of George's gift, but the drunken Kramer immediately spots the red dot, bringing down her suspicion upon George and Jerry. Elaine sees through Jerry's evasiveness and tricks George into confessing to buying a cheap gift, reducing him to tearfully pleading vision impairment and impoverishment.
Working late, George is physically attracted to an office cleaner, and they have drunken sex on his desk. The cleaner, Evie, holds this over George as leverage. George tries to buy Evie's silence by re-gifting the sweater to her. Overjoyed, Evie nostalgically recalls, as a child in Panama, aggressively begging a man for his cashmere sweater. However, she too notices the red dot, and reports George.
Meanwhile, Dick has indeed relapsed to drink, losing his job and drunkenly heckling Jerry's comedy act. At Pendant, Jerry arrives to console a fired George, and Elaine fails to trick Jerry into confessing to switching Dick's drink on purpose. Dick, on a drunken rampage, terrorizes and corners all three of them. George pacifies Dick by offering the sweater—until he also notices the red dot.
Later, a sober Dick watches from the audience with good humor as Jerry jokes about having caused his relapse.