Cafeteria Plan: Definition, Benefits & Everything You Need

Cafeteria Plan: Definition, Benefits & Everything You Need

Salary reduction only can be stand-alone or part of a broader cafeteria plan. It allows an employee to select a pre-tax salary reduction to pay for benefits. It allows funding for certain benefits such as medical and dental expenses on a pre-tax basis. The safe harbour rule applies to plans offering health benefits and to premium-only plans (see the type of plans in the next section).

Cafeteria plans offer tax savings on the front end, because premiums for supplemental benefit policies can be paid on a pretax basis. However, in some cases, pretax premiums can have an effect on taxation on the back end when benefits are paid. The rules vary based on the particular coverage, so the charts below provide a summary of tax consequences when premiums for supplemental coverage are paid pretax and after-tax. Many states, excluding New Jersey and Puerto Rico, provide similar tax benefits as the federal tax rules. One of the key decisions employers make about employee benefits offerings is whether to provide the benefits through a cafeteria plan, also known as a “flexible benefit” or “flex” plan. Dramatically increasing health care costs have made this scenario a reality.

  1. This means that you have less income subject to federal income tax.
  2. This plan lets an employee choose to receive their entire salary in cash or pay for their group insurance on a pre-tax basis.
  3. If your employer has one, you should be eligible to enroll when hired or during your employer’s open enrollment period.
  4. The employee gets to select from a range of offered benefits to pay from the pre-tax account.
  5. By partnering with Take Command, employers can streamline the administration of HRAs, ensuring seamless coordination with Cafeteria Plans.
  6. The cash payment is treated as wages and is liable to all employment taxes if the employee chooses to receive it instead of any eligible perk.

Competitive employers frequently offer Section 125 plans as a perk to help keep current employees content and draw interest from new recruits. Let’s take a look at these plans to help you understand them better and maximize your use of this benefit if it’s offered where you work or are going to work. Employers do not have to allow employees to make midyear election changes except those under the HIPAA special enrollment rights. An employer should include in the plan documents and summary plan description information about which events, if any, would allow for an employee to make midyear election changes. Because of the tax-favored treatment when sponsoring a cafeteria plan for employees, there are significant rules employers must comply with. This plan allows employees to choose from several pre-designed benefit packages.

How a Cafeteria Plan Works

The elected amount of money is divided by the number of payroll periods and deducted from each paycheck for the duration of the plan. In conclusion, effectively integrating Cafeteria Plans with HRAs offers a dynamic approach to employee benefits, balancing flexibility with financial savvy. By partnering with Take Command, employers can streamline the administration of HRAs, ensuring seamless coordination with Cafeteria Plans. This partnership not only simplifies the process but also maximizes the effectiveness of your benefits strategy. Ensure that your written plan document is reviewed by legal counsel and updated as necessary to comply with the regulations outlined by the Employers Council on Flexible Compensation.

Think of health insurance premiums, accident and health benefits, dependent care expenses, and even adoption assistance as different dishes to choose from. The idea is to cater to everyone’s unique needs, making sure all employees find something that works for them. If, under testing, a plan is found to be discriminatory with respect to a plan year, the discriminatory benefits are included in the gross income of the highly compensated or key participants who received them. A cafeteria plan is given its name because it allows employees to choose from various pre-tax benefits like how people select food in a cafeteria. The USA’s Internal Revenue Code allows some benefits, typically those that help with life events, to be excluded from their total receivable income. This is not a strict rule since employees can choose whether to get a salary deduction for these benefits or to receive the cash amount.

Nondiscrimination rules and requirements are complex and can vary depending on the type of pretax benefit being offered. Employers offering a cafeteria plan should seek the advice of a benefits attorney or TPA experienced in nondiscrimination testing. More details on the Section 125 nondiscrimination rules can be found in the 2007 proposed cafeteria plan regulations, which, while not finalized, were effective as of Jan. 1, 2009.

For employers, this could be a disadvantage, especially in a country such as Zimbabwe where hierarchy in an organization is of importance. Higher-level employees may dislike receiving benefits that are at the same level as lower-level employees. However, this would be good for lower-level employees as companies tend to underpay benefits for lower-level employees. Numerous employers across the U.S. set up and use various types of employee benefits plans allowed by the Internal Revenue Service (IRS). One of these plans, the Section 125 (or cafeteria) plan, has been in existence since 1978. Section 125 Cafeteria Plans offer cost-effective benefits for companies.

However, employers can exclude employees who are under the age of twenty-one when a plan year ends or who have less than one year of employment with the employer during the plan year. A simple cafeteria plan protects an employer with 100 or fewer employees from “non-discrimination” requirements in exchange for contributing to their employee benefit plan. This plan lets an employee choose to receive their entire salary in cash or pay for their group insurance on a pre-tax basis.

Benefits to Employers and Employees

This enables employees to purchase benefits, such as health insurance, with pretax dollars. Your contributions to a cafeteria plan are withheld from your paycheck before you pay taxes. You will pay less in federal income tax, Medicare, and Social Security taxes. Navigating the ins and outs of Flexible Spending Accounts (FSAs), integral to Cafeteria Plans, is essential for maximizing their benefits.


Section 125 of the Internal Revenue Code (IRC) specifies that cafeteria plans are exempt from the calculation of gross income for federal income tax purposes. However, some benefits, such as group life insurance benefits that exceed $50,000 or adoption assistance benefits, require employers to withhold both Social Security and Medicare taxes. A health care flexible spending account (FSA) is an example of a benefit offered under a cafeteria plan. A flexible spending arrangement is an employer-sponsored benefit that allows you to contribute pretax dollars to use for out-of-pocket medical or dependent care expenses.

Ultimately, before implementing any tactic, a business must be completely in the clear regarding its actual needs (and what they’re capable of at the moment). Now, as for the disadvantages of these programs, they mainly affect the employers. For instance, if a staff member chooses to quit their job before the entire amount they have received for a specific type of coverage is reimbursed, a company will suffer financial damage. Regardless of whether you work remotely or on-site, healthcare is always a top priority.

Cafeteria Plan HSA – Health Savings Account

A Cafeteria Plan is a benefit provided by your employer which allows you to contribute a certain amount of your gross income to a designated account or accounts before taxes are calculated. These accounts are for insurance premiums and medical or dependent care expenses not covered by your insurance, from which you can be reimbursed throughout the plan year or claim period as you incur the expenses. A cafeteria plan allows you to reduce your gross income, thereby reducing the amount you pay in Federal, Social Security and some State taxes – a savings of between 25% and 40% of every dollar you contribute to the plan. A cafeteria plan is a type of employee benefit plan that is offered in the USA. When an employee receives their salary, it has to be taxed and they receive the net amount.

Annual nondiscrimination tests are required to ensure compliance unless a safe harbor exemption applies. In all cases, working to provide employees with a cafeteria-style benefits plan deserves the assistance of a knowledgeable benefits plan professional who can advise the employer about the various options. Given the complexity of the U.S. tax code and the unpredictable changes in laws, employers should always seek the assistance of a professional.

I’m Misty Berryman, and I’m one of your Personal Benefits Managers. I like working with HSA for America because we’re creating solutions to healthcare problems. Our focus on money-saving alternatives like HSA plans and health sharing programs, and the variety of health share programs we offer, are what set us apart.

So both you and the employee save money by reducing your tax burden. Key details to consider when deciding if a is right for your business. Still, being genuinely interested in your staff and their individual needs is far more than that. And with a section 125 plan, there are other employers’ perks to take into account. The money in this account is to be used only for qualified expenses and must only be used within the plan year. If you use the full benefit of your plan but leave the company before you have paid your full yearly contribution, your employer incurs a loss.

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