A cafeteria plan is a sure form of worker profit plan the place employers supply their workers quite a few completely different pre-tax profit choices from which they might select. That is typically additionally known as a versatile advantages plan. With a cafeteria plan, workers contribute a specific amount of pre-tax earnings in trade for accessing sure mixtures of advantages, reminiscent of life insurance coverage, medical insurance, and incapacity insurance coverage, they’ll then entry at this pre-tax price.
How does a cafeteria plan work?
Cafeteria plans permit workers to make use of pre-tax {dollars} to pick from quite a few employer-offered advantages. These advantages usually embrace issues like a well being financial savings accounts (HSAs), group life insurance coverage, incapacity insurance coverage, and versatile spending accounts (FSAs). They might even embrace issues like adoption help advantages or money advantages.
What are the benefits of a cafeteria plan?
A cafeteria plan permits an worker to tailor their advantages to how they finest really feel they want them at a given life stage. For instance, an worker might select the place to place their pre-tax {dollars} to maximise these {dollars} for his or her households’ wants, deciding on a sturdy well being plan at a time after they must be accessing plenty of well being care companies for his or her household, or spending much less on medical insurance however extra on 401k matching at instances when that makes extra sense for them.
Due to the best way it makes use of pre-tax {dollars}, a cafeteria plan additionally reduces a given worker’s quantity of taxable earnings for a given tax yr.
What are the disadvantages of a cafeteria plan?
One vital issue to remember is that an worker should decide how a lot from their pre-tax wage to contribute to cafeteria plan advantages earlier than the start of the brand new tax yr. And any pre-tax {dollars} not spent on cafeteria advantages in a given tax yr are forfeited if not used. For instance, if somebody decides to contribute $3000 to a HSA for a given yr, however finally ends up solely having $2000 in well being care prices, then they are going to have misplaced $1000 pre-tax {dollars}.
Additionally vital to remember is that if an worker opts for any form of taxable profit like money, then shall be accountable for that profit on their annual earnings taxes.
Due to their complexity, a cafeteria plan is extra burdensome and troublesome for an employer to handle, regardless that it will probably have monetary advantages for an employer due to using an worker’s personal pre-tax {dollars}.