Remember the 80s when Hollywood hugely glorified the teenage drama? Somehow, every high school struggle found its way into the cantina and determined one’s destiny by where one sat during the lunch break. Well, the term we’re about to analyze thoroughly has very little to do with it (sincere apologies to John Hughes). So, what is a cafeteria plan, and how does it work? Show
In simple words, it’s a specific type of employee benefit. It usually encompasses a variety of taxable and non-taxable perks provided by an employer. Sounds swell? It sure is! Let’s see what it entails and if there are any downsides to it. What is a Cafeteria Plan Provided by an Employer?A section 125 cafeteria plan (or, simply – cafeteria plan) applies to a kind of employee benefits program. In this scenario, an employer grants employees a couple of different taxable and non-taxable benefits. It is then up to the employee to choose which perks would suit their personal needs. What about the origin? 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. Here is another fact to keep in mind: if cafeteria plans discriminate in favor of highly paid employees, they must report these benefits as income. Still, there’s more to grasp. Let’s find out what else is on the menu. How Does it Work?In order to set a cafeteria plan in motion, employees need to pick one qualified benefit plan and one taxable benefit. What does it mean? Firstly, a qualified benefit is a tax-deferred plan the firm deducts from employees’ gross salary under the IRS’s provisioning code. Some eligible benefits can apply to health saving accounts and other healthcare benefits, adoption assistance, or disability insurance. A taxable benefit allows employees to add some money to their salary monthly rather than putting it toward benefits plans. For example, with company-sponsored healthcare coverage, employers finance certain shares of each employee’s premium account. If an employee chooses to back out of the program, they will not get paid for the amount their premiums might have cost. Also, in section 125 plans, companies can offer their staff the value of the benefits as cash. Then, employees can use that capital to pay for taxable benefits. Here’s one last piece of information businesses must grasp: programs that offer only taxable benefits can’t be perceived as section 125 plans. What Is an Example of a Cafeteria Plan?So, if you’re still with us, without being mildly disappointed by the fact that we haven’t mentioned a single delicious dessert, let’s cover a few examples of section 125 employee benefits:
Nearly every employee pays their medical and healthcare expenses with their own post-tax money. However, a cafeteria plan enables employees to save money on costs they already paid for. If you pay for these expenses upfront, you can submit a claim and necessary documentation to a plan administrator for reimbursement from your accounts. Cafeteria Plan HSA – Health Savings AccountRegardless of whether you work remotely or on-site, healthcare is always a top priority. And when it comes to learning more about cafeteria plan HSA – you’re in for a lot of abbreviations! And advantages, of course. Employees can take some money from their paychecks and put it into this savings account to pay for IRS-approved medical and healthcare costs. The employee should add a certain amount of cash into the account each year, up to a maximum limit. To obtain this program, an employee should have an HDHP (high-deductible health plan) to save up for qualified medical costs. This specific type of health insurance plan provides low premiums and high deductibles, which makes it highly beneficial for each employee who chooses it. Cafeteria Plan: Advantages and DisadvantagesLike any other program, this one offers quite a few upper hands accompanied by some drawbacks. The best aspects of these plans include:
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. Still, all these drawbacks are pretty easy to overcome. It all starts with having an honest and open relationship with employees and colleagues. That way, agreements can be made in such a manner that everyone is worry-free. How Does a Cafeteria Plan Benefit the Employer?Excellent employee experience is always a goal. 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. These plans also allow companies, and especially small business owners, to cut some costs when it comes to their employees’ benefits. For instance, an employer doesn’t need to pay:
These financial advantages are due to the fact that section 125 cafeteria plans decrease payroll taxes. This further leads to reducing or eliminating the expenses linked to allowing cafeteria plans. Finally, all unused means in employees’ FSAs stay with the firm. How Does it Benefit the Employees?Aside from granting wellbeing throughout the entire employee lifecycle within an organization, a cafeteria plan allows employees to save up and maneuver their expenses more smoothly. Here are a few crucial cafeteria plan benefits:
Overall, these benefit programs have more pros than cons, and they contribute to employees’ satisfaction. Know Your Terms & Set Your AimsSaving up, improving employee experience, and having a few proven strategies for benefit packages in mind sounds like a superb way to run a business. Considering a cafeteria plan and understanding how it works might easily be a perfect solution. Nevertheless, before starting to enjoy the perks of this practice, it’s essential to grasp the potential negative aspects as well. 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). And if you need any help with understanding your team and growing it, reach out to professional tech recruiters and fulfill your aims sleekly! Cafeteria plans, also called Section 125 plans, are growing in popularity. Their introduction came during the early 1980s when flexible benefits became a priority for workers. Employers used them to provide multiple benefits, including healthcare insurance, in a package that offered tax savings advantages for the business and its employees. Two cafeteria plans get implemented more often than any others. Most employees use flexible spending arrangements (FSAs) or pre-tax premium conversion plans. It is not unusual to combine the features of both selections into the design implemented at the company. There’s also the option to have a full-flex plan that offers the original Section 125 concept of having multiple insurance providers, coverages, cash, or vacation days. The IRS outlines the legal requirements for these plans under Section 125 of the Internal Revenue Code. When reviewing the advantages and disadvantages of a cafeteria plan, it is essential to remember that it cannot discriminate in eligibility, contributions, or benefits. List of the Advantages of a Cafeteria Plan1. This approach addresses the needs of employees. Most options also allow workers to make changes when there is a significant life event, such as a marriage, divorce, or the birth of a child. That allows a business to provide better supports for its workers without discrimination while each employee receives a somewhat customized approach. 2. It requires businesses and workers to pay less tax. 3. Cafeteria plans offer a measure of cost control. 4. It creates a competitive benefits program. 5. Improvements occur within the employee-employer relationship. 6. Workers have a better understanding of their benefits. Because there is such a high level of active ownership of the benefits received, employees have more ownership over their performance each day. Businesses see higher productivity levels when using the cafeteria plan approach to the issuance of benefits. 7. It can respond to the needs of a diverse workforce. 8. This approach can soften the blow that rising premiums can cause. 9. The tax savings can get used to invest in retirement plans. Even if money doesn’t go toward a retirement plan, employees can have more discretionary spending funds to use for a variety of needs. It is easier to establish an emergency savings plan with the freed-up cash from a cafeteria plan than it is to use a more traditional benefits package. 10. Cafeteria plans follow comprehensive non-discrimination rules. If a plan fails any of the above tests, then the organization will lose the favorable tax treatment of this benefit. Participants who are not key workers or highly compensation will not lose their tax benefits even in this scenario because they’re not impacted by the failure of a plan to pass this testing. 11. It provides a larger dependent care deduction. Even though the costs are comparable, using pre-tax funds to pay for these expenses reduces the impact of your financial obligation to the government. A $5,000 qualifying benefit for someone paying 12% in taxes would offer more than $500 in value for the entire year. List of the Disadvantages of a Cafeteria Plan1. Businesses can only offer a cafeteria plan to employees. 2. Some of the benefits are only available for a limited time. 3. It may require workers to pay out-of-pocket expenses. Although the costs are generally covered by this benefit, some cafeteria plans may have strict guidelines on some procedures that some workers may not know. Before receiving an MRI, it may be necessary to receive prior approval. Failing to follow the rules may result in the entire expense being fronted by the worker without receiving compensation. 4. There can be initial setup fees that must get paid. 5. Most employees cannot change their cafeteria plan for an entire year. Even when a qualifying event occurs, the cafeteria plan only allows workers to make election changes that are consistent with what happened in life. If a worker gets divorced, then they can remove their spouse or domestic partner while adding children. Canceling their health coverage would not be permissible. 6. Ongoing compliance issues can add unwanted complexity to the cafeteria plan. 7. Businesses must distribute a summary plan description to everyone. Participant beneficiaries must also receive this documentation within 90 days of becoming eligible for benefits. Companies must also file the paperwork with the Department of Labor within 120 days of the plan’s effective date. 8. It may require more financial liquidity for some businesses. That means employees can choose healthcare benefits, vacation days, and other selections or decide to receive a direct cash contribution. If several workers choose the latter option, then agencies may need to keep more financial liquidity available each period to ensure they can meet their obligations. In this circumstance, they might also be paying more for some benefits than necessary. 9. It can cost more for some companies. Conclusion If your business is weighing the advantages and disadvantages of cafeteria plans, then the first stop on that journey should be to review the Employer’s Guide to Fringe Benefits section on the subject in the IRS Employer’s Guide. This information will help you to understand the different benefit types that fall into this category. Most companies find that the use of a third-party administrator is the simplest route to use when setting up a Section 125 plan. The outsourced agency can handle the daily administration requirements while the internal human resources team can help workers understand the benefits of each offer. Clear lines of communication are necessary to avoid the disadvantages of using this approach. Cafeteria plans may not be for everyone, but it can be an easy way to attract and retain the best talent in a community. |