Cafeteria–style benefit plans have become popular over the last couple of years when it comes to employee benefits. But what is a cafeteria-style benefit plan exactly, and how does it work?
What are cafeteria-style benefit plans?
Cafeteria-style benefit plans are a form of employee benefit that provides participants an opportunity to receive certain benefits on a pretax basis. Cafeteria Plans may include options like insurance benefits and benefits designed to help employees deal with life events.1 Cafeteria-style benefit plans are also known as section 125 plans because they meet the requirements and regulations of section 125 of the Internal Revenue Code. Federal, state, and social security taxes do not apply to contributions to plans.2
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“Employees can customize their cafeteria-style benefit plans to meet their specific needs with flexible plan options.”
How do Cafeteria Style Benefits work?
In spite of being named after a cafeteria, cafeteria-style benefit plans are not related to food. The same way individuals select food at a cafeteria, employees can select the benefits of their choice -on a pre-tax basis- from a pool of options provided by their employers.3 As the diversity within the workforce continues to grow and employees seek more customized benefits tailored to meet their specific needs, these plans become more useful. Employees can customize their cafeteria-style benefit plans to meet their specific needs with flexible plan options.For example, an employee who is retiring may be best served by a 401(k) plan, whereas a family-planning employee might prefer a health plan that offers broad coverage.
What are the Possible Options?
A cafeteria plan is a good option for employees who are interested in tailoring their insurance plans to meet their needs and their family’s needs. Even though Section 125 of the Internal Revenue Code provides outlines the requirements of cafeteria plans, no two plans are the same. Therefore, you should do your research before signing up for any plan provided by your employer.