What is a Cafeteria Plan?

A Cafeteria Plan allows employees to select certain benefits normally paid on an after-tax basis and, through payroll deduction, to pay for these benefits on a pre-tax basis. Paying for these benefits in a pre-tax basis allows you employees to increase their take home pay without costing the employer more money (See Exhibit 1). Cafeteria plans, also known as Section 125 or Flexible Spending Accounts, can be structured to include a variety of benefits. The most common include:

• • Premium Conversion Plans - Qualified health, dental and vision insurance benefits enable employees to pay their share of premium with pre-tax dollars. Employees may contribute to their HSA with pre-tax payroll deductions.
• • Medical Flexible Spending Accounts – Employees can use salary reduction to reimburse certain medical expenses on a pre-tax basis through individual accounts.
• • Dependent Care Flexible Spending Accounts - Employees can use salary reduction to reimburse dependent day care expenses on a pre-tax basis through individual accounts.

By offering Section 125, employers are able to realize the benefits of:

• • Reducing Payroll Costs – Social Security contributions are reduced for each dollar of employee participation.
• •Controlling Cost – An employer can control the company’s share of benefits costs without limiting employee choices.
• •Addressing the Needs of a Diverse Workforce – An employer can offer individually tailored benefits at littler no additional cost to the company.
• •Recruiting and Retaining Quality Employees – An employer is viewed in a positive light by employees because a benefit package is being provided with the employee’s interests in mind.