What is a cafeteria plan?
A cafeteria plan is a separate written plan maintained by an employer for employees that meets the specific requirements of and regulations of section 125 of the Internal Revenue Code. It provides participants an opportunity to receive certain benefits on a pretax basis. Participants in a cafeteria plan must be permitted to choose among at least one taxable benefit (such as cash) and one qualified benefit. A qualified benefit is a benefit that does not defer compensation and is excludable from an employee’s gross income under a specific provision of the Code, without being subject to the principles of constructive receipt.
A Cafeteria Plan is an umbrella for a group of employee benefit programs where eligible employees choose to participate and thus defer cash compensation. The IRS rules allow employees to use pre-tax dollars for payroll deductions for several of these programs; others can be non-taxed fringe benefits. The Cafeteria Plan guides the overall program in that these plans must not discriminate and most are ERISA plans. Specific Internal Revenue Code (IRC) sections govern the rules and procedures for each program within the Cafeteria Plan framework. These benefits are primarily for employees, there are significant limitations on the participation allowed for owners and partners.
As its name suggests, a cafeteria plan allows an employee to choose where his or her benefit dollars will be spent. The plan can provide a number of selections, including medical, accident, disability, vision, dental and group term life insurance. It can reimburse actual medical expenses. It can pay children s day care expenses. And, it does these things with pre-tax dollars. One thing to remember is that these benefits must be funded with tomorrow s earnings, not yesterday s. By that I mean, each person must estimate the costs that he or she will incur during the plan s upcoming year and request to have the estimated amount redirected from wages into the plan. One important key to the successful implementation of a cafeteria plan is properly informing your staff of the plan s positive and negative aspects. You are asking your employees to transfer some amount of future wages into your cafeteria plan. What do they get out of it? Naturally, such a plan allows a small business to offer b
Generally, a cafeteria plan (sometimes called a flex plan) is a separate, written benefit plan maintained by an employer under which all participants are employees and each participant has the opportunity to select among a range of offered benefits. A cafeteria plan must allow employees to choose between receiving cash (a taxable benefit) and at least one “statutory nontaxable benefit.” Cafeteria plans are permitted under Section 125 of the Internal Revenue Code. Plan choices can be: • among different levels of the same benefit (such as different health plans); or • among different types of benefits (such as between life insurance, dental insurance, and vision benefits). Code Sec. 125 requirements. In order for a flex plan to be a cafeteria plan and keep its tax-favored status under Code Sec. 125, the plan must: • permit employees to choose between two or more benefits, consisting of at least one nontaxable benefit and cash; • be a written plan; • be for employees only (i.e.,allow only
A cafeteria plan can be very simple, merely offering employees the ability to pay their share of healthcare premiums with pre-tax dollars, or it can have a very elaborate menu of benefit election choices. Common benefits include health plans, group term life insurance, accidental death and dismemberment insurance, long term disability benefits, dependent care reimbursements, or health care expenses deductible under IRC Section 213.
