Cafeteria Plans
While more choice is always welcome, there are several drawbacks to cafeteria plans. This is what you should know if you're considering offering this benefit.
Background
A cafeteria plan sometimes is referred to as a flexible benefits plan because it allows employees to choose from a variety of qualified benefits, which are generally not included in revenues. Employees decide how a lot of their gross income they would like to use for benefits before any taxes are calculated and deducted.
Qualified benefits include:
- Accident and health benefits
- Adoption assistance
- Dependent care assistance
- Group-term insurance coverage not exceeding $50,000
- Health savings accounts including distributions to cover long-term care services
Employer‐provided benefits that aren't contained in revenues and are not allowed in a cafeteria plan are called non-qualified benefits. Nonqualified benefits include:
- Scholarships
- Employer-provided meals and lodging
- Educational assistance
- Fringe benefits.
There are some types of cafeteria plans:
- Full flex plans: Employers make a contribution for all plan-eligible employees, who they can use to buy various benefits. For benefits that employer contributions don't cover, employees can make pre-tax contributions.
- Premium-only plans (POPs):
Employees can pick between receiving their full salary in cash or use a share of it to pay group insurance plan premiums on a pre-tax basis.
- Simple cafeteria plans: In exchange for contributing to each eligible employee's benefits, employers with 100 or fewer employees can get safe harbor from certain plan non-discrimination requirements.
- Flexible spending arrangements (FSAs):
These allow employees to create contributions toward health care and dependent care expenses on the pre-tax basis.
Pros
Here are a couple of the reason why employers and employees like cafeteria plans.
- Customization: The cafeteria plan approach addresses a wide variety of needs for employees in various life situations. Rather than one-size-fits-all benefits, employees can pick the advantages that fit their own requirements. When their demands change, they have a chance to adjust their selections every year. Many different plans also allow employees to create changes if you find a significant life event, like a marriage, divorce, or the birth of the child.
- Financial considerations: As mentioned, employers and employees pay less tax. Employers don't pay FUTA or FICA taxes on the salary reduction amount. Similarly, employees don't pay the federal tax, FICA, or state and local income tax on the reduction – even though there are exceptions in certain jurisdictions.
Cons
Despite the benefits, cafeteria plans have some negative features.
- Finances: Unless specified in the program documents funds placed into a cafeteria plan by a worker that are not used are forfeited. The plan documents can, however, allow as much as $570 to rollover. Without the rollover option in a plan, for instance, if an employee allocates $2,000 for medical expenses but only spends $1,500, the worker loses the $500 worth of benefits. Another financial situation to consider happens when an employee, who are able to choose from both non-taxable and taxable benefits under cafeteria plans, chooses a taxable benefit for example cash. The employee will get in a tax liability for the tax year when the cash benefit was received.
- Strict requirements: Most flexible spending accounts require employees to pay for their care expenses up front and receive reimbursement later, after it may be proved their expenses have met the plan's criteria. Some procedures, like an MRI, may need prior approval. Without such approval an employee might bear the whole cost without reimbursement.
- Limitations: Employers only can provide cafeteria plan benefits to employees. Full-time independent contractors, freelancers, gig workers, and other essential staff may get excluded out of this benefits package.
- Administration: There is usually a setup fee, and even though offset through the financial savings, the initial cost and additional infrastructure expenses might be a lot more than some small businesses can manage. Plus, cafeteria plans can be complex and time-consuming to administer.
