Cafeteria Plans
Cafeteria Plans
A cafeteria plan is an employee benefit arrangement that lets employees choose from a variety of benefits in order to craft a benefit plan that suits their needs. The name comes from the cafeteria-like manner of choosing benefits. It is also known as a Section 125 plan, or just 125 plan, after the section of the IRS code for which it is named.
Things To Know
- Cafeteria plans let you choose from a variety of benefits to craft a benefit plan that suits your needs.
- Most cafeteria plan benefits are pre-tax.
- Cafeteria plans usually offer benefits during an enrollment period.
What benefits are available?
Cafeteria plans can include a large number of benefits such as retirement plans, health insurance, disability insurance, vision and dental insurance, and group term life insurance. They can also offer flexible spending accounts, which reimburse qualified medical expenses. As well, they can even include cash benefits.
To qualify, a cafeteria plan must allow employees to choose from at least two different benefits that include cash or qualified plans. Qualified plans are those that receive tax advantages under IRS rules.
Cafeteria plans usually offer benefits during an enrollment period. An employee cannot normally change or add coverage during the plan year unless there is a change in his or her status (for example, a change in the number of dependents covered).
How are they paid for?
Most cafeteria plan benefits are pre-tax, meaning that they are paid with employees’ earnings before they are taxed. Typically, they are taken out through payroll deduction. Although cafeteria plan benefits are normally pre-tax, there are also occasional situations where employees must report the benefits as income. One situation is when the plan discriminates in favor of highly compensated employees.
As with some other employee benefits, the question of who pays for them and how much varies. With insurance plans, for example, employees may be asked to pay for some of the cost.
Perspectives on cafeteria plans
Cafeteria plans tend to become more useful to employees as the number of employees grows and diversity increases. For example, the needs of a single person may differ from the needs of a family. The needs of a parent may differ from the needs of a non-parent. The needs of a twentysomething employee may differ from those of a sixtysomething employee. The more diverse the workforce, the more benefits that can be offered.
A final word
Section 125 has been amended many times to address the needs of employees and may continue to be addressed as the needs of the workforce change. The IRS and the Treasury Department issue rules and regulations periodically that cover the various eligibility and tax issues.