Cafeteria Plan—Flexible Benefits

AuthorTim Barnett

Page 65

A cafeteria plan, also called a flexible benefit plan, allows employees to choose from a menu of optional benefits the ones that best fit their individual needs. Thus, employees can customize their benefit packages. In a cafeteria plan, benefits required by law (e.g. Social Security, unemployment compensation, workers's compensation) and those mandated by company policies or labor agreements are supplemented by a list of other benefits to which employees can subscribe. Employees's choices of optional benefits are limited only by the total benefit dollars available and the variety of benefits offered by the employer. Optional benefits that are often part of cafeteria plans include dental insurance, vision care, group-term life insurance, child care, and disability insurance. Many companies offer some form of cafeteria benefit plan to their employees, although smaller companies are less likely to offer flexible benefits than larger companies.

Most cafeteria plans are compliant with Section 125 of the Internal Revenue Code. This means that they meet specific requirements set out by the Internal Revenue Service. Such plans offer the potential of cost savings to both employers and employees, particularly because amounts spent by either the employer or the employee are spent out of pre-tax earnings. Thus, both employers and employees may save on Federal Insurance Contributions Act payroll taxes and the employee may save on state and federal income taxes as well.


There are several variations of cafeteria plans, including core-plus plans and modular plans. Core-plus plans provide a set of mandatory benefits that are usually designed to meet the basic needs of all employees. In addition to legally-required benefits, medical insurance, long-term disability insurance, and retirement benefits are often included in the core. Optional benefits are offered to employees who spend benefit credits to select other benefits that best fit their needs. Modular plans usually package several different bundles of benefits that offer increasingly extensive arrays of benefits. The basic module might include only the legally-required benefits, basic health insurance, and life insurance. A second module might include everything in the basic module plus additional benefits. A third module might include everything in modules one and two and even...

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