Over the past few years, you may have heard the term
cafeteria plan come up when talking about insurance policies. But what exactly is a cafeteria plan and how does it work?
Cafeteria plans are simple to use for the employee. All an employee needs to do is enroll in the desired plan, any payment for their benefit is taken on a pre-tax basis from their paycheck
What is a Cafeteria Plan?
According to the IRS, “A cafeteria plan is a separate written plan maintained by an employer for employees that meets the specific requirements of and regulations of section 125 of the Internal Revenue Code.”1 In other words, a cafeteria plan is an optional employee benefits plan provided by an employer which allows employees to choose their coverage among a range of pre-tax benefits.2 Investopedia cites that since no federal, state, or Social Security taxes are deducted to pay for a cafeteria plan, employees who enroll in a cafeteria plan have the potential to save between 25% and 40% of every dollar they invest in the plan depending on their selection.3
How Does a Cafeteria Plan Work?
Despite the name, cafeteria plans have nothing to do with food – however, they do allow employees to choose from a variety of options before settling, kind of like one would in a cafeteria. Meaning, employees get to choose their coverage under a cafeteria plan by ascribing to a plan that best fits their needs. In addition, cafeteria plans aren’t just limited to employees, Cafeteria plan benefits are available to an employees’ spouse and dependents as well.1
Another notable feature of the cafeteria plan comes in the form of employer contributions.1 That is to say, employers also contribute to an employee’s cafeteria plan through lowering the cost and providing qualified benefits on a pre-tax basis.1 This feature of cafeteria plans can significantly lower costs, improve quality of life, and provide additional security where needed most.
Aside from providing voluntary benefits with employer contributions, cafeteria plans are perhaps best known for their personalization, allowing them to meet the mounting needs of a diversifying workforce with ease.3 However, while the individualization cafeteria plans offer are great for employees and their families, the individualized structure of cafeteria plans can make them daunting and complex to administer from an employer’s perspective.3 For example, an employee may receive a number of communications from their employer with information about changing benefits, increasing premiums, or more.3
Despite the obstacles they provide, cafeteria plans are simple to use for the employee. All an employee needs to do is enroll in the desired plan, any payment for their benefit is taken on a pre-tax basis from their paycheck—meaning there are not additional premiums to pay out-of-pocket. The only additional task employees are required to do is reenroll on an annual basis.
To Summarize…
Cafeteria plans are a great option for employees looking to personalize their coverage options to best fit the needs of themselves and their families. Since no federal, state, or Social Security taxes are deducted to pay for your coverage, employees who enroll in cafeteria plans may potentially save between 25 percent and 40 percent of every dollar they invest.3 However, despite the structure of cafeteria plans being the same under section 125 of the Internal Revenue Code,1 no two cafeteria plans are the same. For this reason, it’s important to do your research before enrolling in any plan provided to you by your employer.