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What is a Cafeteria Plan?

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  • Written By: Mary McMahon
  • Edited By: Bronwyn Harris
  • Last Modified Date: 26 March 2014
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A cafeteria plan is an employee benefits plan which allows employees to choose from a list of options, much like they might choose from a cafeteria menu. There are some distinct advantages to cafeteria plans for both employees and employers, especially for small businesses. If you work for a company which offers a cafeteria plan, check your options out carefully, and don't be afraid to ask for assistance to ensure that you choose the benefits you need.

Some common inclusions on the menu of a cafeteria plan are: cash, health insurance, childcare assistance, life insurance, payments into retirement accounts, adoption assistance, paid leave, and assistance with care for injured or disabled family members. Depending on an employee's personal needs, he or she can choose from these options to construct the ideal benefits package. For example, a young woman who is planning on having children in the near future might choose to put payments toward paid maternity leave, health insurance, and child care.

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A company funds its cafeteria plan by establishing reimbursement accounts which employees pay into to receive benefits. Employees can decide how much they want to pay; this amount is usually limited by annual income and restrictions from the employer. The money paid into a reimbursement account is pre-tax income, which means that employees and employers are not taxed on it in the same way that they are taxed for wages. This can increase net take home pay for employees by reducing income tax, and it helps employers by reducing payroll taxes.

Because a cafeteria plan reduces the amount of taxes which must be paid, some people refer to it as a “tax-advantaged benefits plan.” There are other tax-advantaged benefits plans which companies can use to help their employees, although a cafeteria plan is a great starting point. From the perspective of employers, it allows a company to offer more benefits because it encourages tailored benefits, and employees appreciate the flexibility with their benefits, which in turn encourages them to stay loyal to their parent company.

Any time you start a new job, you should check on the benefits plan, if there is one. Employee benefits can get extremely complex, and most companies maintain several staff members who are familiar with the ins and outs of the benefit options. These employees can help you use your benefits wisely, and in the case of a cafeteria plan, they can help you to select the best option for your needs.

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Discuss this Article

anon273756
Post 3

Why can I not be dropped from my wife's plan?

afterall
Post 2

@sapphire23, I think the reason not every company chooses to provide cafeteria plans to their employees is that despite such a plan's many benefits, it would likely be much more complicated in terms of finances and managing to provide that many options and differences among workers. More choice means more time, which often means more overhead. However, some companies may find that putting money and time in this way prevents more expenses and trouble down the road, making a cafeteria plan a better choice.

sapphire12
Post 1

There seem to be many cafeteria plan benefits over a plan in which all employees get the same benefits. After all, it sounds like in this plan, a single person could get a less inclusive health plan, while focusing on retirement, while employees with families could get better health packages that their children need.

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