What is a Cafeteria Plan?

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.

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.