What Is A Cafeteria Plan In Employee Benefits?

Other options include retirement deposits, supplemental life or disability insurance, Health Savings Accounts, and various medical or dependent care expenses. A cafeteria plan allows employees to put tax-free money into an account that they can use to cover qualifying medical or dependent care expenses. Health savings accounts, health flexible savings accounts, and dependent flexible savings accounts are all types of cafeteria plans. Cafeteria plan selections include insurance options, such as health savings accounts (HSAs), group term life insurance, and disability insurance.

Part 3: Confidence Going Into Retirement

For example, all cafeteria plan participants must receive a summary plan description (SPD) within 90 days of enrolling in the plan. The main benefit of a cafeteria plan is its power to lessen your tax burden by providing benefit accounts for health and dependent-care expenses. If you believe you’ll have medical or dependent-care expenses, putting money in this type of plan would most likely help you save. Cafeteria plans tend to reduce your tax liability because your money is taken out pretax.

• A cafeteria plan, when implemented properly, can boost an employee’s take-home pay without affecting their remuneration.
• In a sense, employees divert a portion of their gross income to pay for their chosen benefits before taxes are applied, resulting in tax savings both for them and the employer.
• Except in the case of a qualifying life event, employees who have already enrolled in a cafeteria plan and made their selections often cannot change them.
• Any employees that take part in this plan can save between 28% and 48% in cumulative local, state, and federal taxes.
• A 401(k) cafeteria plan allows employees who are participating in their employer’s 401(k) plan to also choose additional types of benefits from a smorgasbord of options on a pretax basis.
• If an employee chooses to back out of the program, they will not get paid for the amount their premiums might have cost.

Employees can then supplement the CDHC with their own money and use it to buy additional benefits or coverage. For example, $25 per pay period is automatically deducted tax-free if an employee elects to have $600 per year deducted from their pay and placed into the plan and the company has 24 pay periods. It can then be distributed for reimbursement upon request for qualified expenses.

A cafeteria plan might allow for the funding of an HSA, also known as a health savings account. This program was named after the most initial types of policies that enabled employees to pick between different sorts of benefits. The analogy was quite clear – the plans worked in the same manner as a customer that decides between available meals and beverages in a cafeteria. Any employees that take part in this plan can save between 28% and 48% in cumulative local, state, and federal taxes.

Requirements of a Cafeteria Plan

Most employee benefit plans are covered by the Employee Retirement Income Security Act (ERISA) and must also furnish a summary plan description (SPD). An SPD is a plain-English version of the main plan document and the adoption agreement, and it is meant to inform employees about the aspects of the cafeteria plan. The plan documents must be updated and amended at least every five years to reflect any applicable plan changes or regulatory updates. A cafeteria plan gets its name from a cafeteria but has nothing to do with food. Just as individuals make food selections in a cafeteria, employees can choose the benefits of their choice before payroll taxes are calculated from a pool of options offered by their employers.

Requirements

Employees estimate how much they want to contribute to the cafeteria plan before the beginning of the tax year. This amount is divided by the number of payroll periods and subtracted from each paycheck. The money that is subtracted is pre-tax, meaning employees don’t have to pay tax on it. But in most cases, if they don’t use the money set aside before the end of the year, it is forfeited. Your contributions to a cafeteria plan are withheld from your paycheck before you pay taxes.

• Although the take-home pay initially looks lower, if you’re going to need to cover health care costs or dependent care costs, you’ll end up saving money by using a cafeteria plan.
• The money in many types of cafeteria plans will not roll over from one year to the next.
• They may also have to perform non-discrimination tests, depending on the plan, to ensure that it doesn’t favor highly compensated or key employees.
• If a cafeteria plan fails any of the nondiscrimination tests, then the highly compensated participants and/or key employees will lose the tax-free status provided by the cafeteria plan.
• This can save workers 20% to 40% in taxes per year but these plans offer employers some tax-saving benefits as well.
• Cafeteria plans are particularly good for participants who have regular expenses that are related to medical issues and child care.
• To set up a section 125 benefits plan, employers have to draft a document that outlines the benefits offered, contribution limits, participation rules and other information required by the IRS.

Benefits to Employers and Employees

Cafeteria plans are particularly good for participants who have regular expenses that are related to medical issues and child care. To set up a section 125 benefits plan, employers have to draft a document that outlines the benefits offered, contribution limits, participation rules and other information required by the IRS. They may also have to perform non-discrimination tests, depending on the plan, to ensure that it doesn’t favor highly compensated or key employees. Without the proper knowledge, these tasks can be difficult, which is why many employers enlist the help of a third-party administrator to set up and manage their cafeteria plan.

Submit to get your retirement-readiness report.

Thomas’ experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning. These circumstances in and of themselves are not enough to justify a special open enrollment. Employees usually have to provide a marriage license, birth certificate, letter from an insurance company or other documentation to prove their eligibility. A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation. Our goal is to deliver the most understandable and comprehensive explanations of financial topics using simple writing complemented by helpful graphics and animation videos. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice.

Cafeteria plan

Section 125 of the Internal Revenue Code states that the amount of money that an employee contributes to cafeteria plan benefits is not factored into that employee’s gross income calculation. The employee may use pretax payroll deductions to cover any benefit that isn’t fully provided by the company. Nondiscrimination rules and requirements are complex and can vary depending on the type of pretax benefit being offered.

If they offer the same benefit payments to every eligible employee, employers with 100 workers or fewer are exempt from the plan non-discrimination requirements. Your employer should provide you with documents that detail the plan benefits and any rules or eligibility requirements you need to know about. If your company offers a cafeteria plan, you’ll most likely be able to sign up during your company’s open enrollment period. If you decide you want to enroll, you can choose or “elect” how much you’d like to contribute to your plan. Contributing to a cafeteria plan may still result in a net benefit even if you do get dinged by an excess amount of funds. You cafeteria plan notice that you have $100 remaining in the account at the end of the year.