Cafeteria Plan – Definition

Cite this article as:"Cafeteria Plan – Definition," in The Business Professor, updated March 8, 2019, last accessed May 31, 2020, https://thebusinessprofessor.com/lesson/cafeteria-plan-definition/.

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Cafeteria Plan (Employee Benefits) Definition

A cafeteria plans another name for Section 125 plan refers to a workplace benefits plan that allows employees to give way their taxable salary income that is for purchasing qualifying benefits through a company’s plan. There is a list of options from which workers make their benefit plans’ choices. There is a withholding of the proportion of workers’ salaries for a premium payment, fees for the plan and additional benefits purposes. The benefits in this plan include; Retirement plans, health insurance, flexible spending account, durable medical equipment, Chiropractic services, dental and ophthalmic insurance to mention a few.

A Little More about What is a Cafeteria Plan Under Section 125

Cafeteria plans is essential part in practice of employing and retaining qualified workers. Section 125, cafeteria plans is significant in helping the employees to access important health and welfare benefits. There is a possibility of saving a large amount of money by being a member of the cafeteria plan more so the benefits they are capable of purchasing even if not offered in the plan. Employees can save on their income taxes in regards to social security and Medicare and Payroll taxes. Besides, employees do save about 7% of their payroll taxes for each dollar workers contribute to the cafeteria plan as a result of no taxes applied to the worker’s contribution in the section 125 plan.

Even though cafeteria plans are beneficial, sometimes they are either not good or provide fewer benefits than the employees could purchase separately from the cafeteria plan. For instance, the 401k plan of the cafeteria provides a limitation to investors for the few options. In IRA investments, investors obtain the same percentage of tax deduction in addition to possible better returns.

In qualifying as a section 125 plan, an employer should be not favored employees consider an employee’s position or rank. There should be fairness in the administration of the plans as the benefits should be offered to all employees who qualify and not reserved for high salaried workers, managers or shareholders.     

References for Cafeteria Plan

Academic Research on Cafeteria Plan

  • Employee preferences for nontaxable compensation offered in a cafeteria compensation plan: An empirical study, White, R. A. (1983). accounting review, 539-561.  US Congress tried increasing the use of some fringe-benefits by statutorily excluding them in the gross income. The study that was undertaken showed that both multivariate and univariate analysis of variance statistics showed the education, retirement and legal benefits’ preferences were affected by tax status while all noncash benefits’ preference except insurance were affected by job classification. Besides, large amounts and variation of fringe benefits had chosen provided suggestion on the employees’ acceptability to the cafeteria compensation plan.
  • Personal finance education for employees: Evidence on the bottom-line benefits, Garman, E. T. (1997). Journal of Financial Counseling and Planning, 8(2), 1.  The paper states that employers having employees’ long-term welfare would offer personal finance education to them. Employers provide financial education because of poor involvement of employees in 401k retirement plans in addition to the fear of negligence lawsuits from their former employees as a result of poor pension plan resulting to employers offering narrowly focused retirement’s financial education. The author suggests that employers offer wide-ranging personal finance employee education because of low cost and high benefits.
  • Flexible benefits for small employers, Simmons, J. G. (2001). Flexible benefits for small employers. Journal of Accountancy, 191(3), 37. According to this paper, flexible benefits or cafeteria plans are the arrangements of employees and employer in which the former has the discretion of matching their benefits package to their specific needs. Employees chose their most valued benefits and forwent those less valued. In most plans, employees are provided with a choice of health care and insurance in addition to spending accounts. Some few plans offer dependent care, option assistance legal assistance benefits in addition to pet insurance. In this plan, employees get the benefits they seek in addition to saving tax. The reasons for the implementation of flexible benefits is the improvement of recruitment, retention, and employee’s motivation while enhancing corporates image and reducing operating costs like taxes.
  • Diversity in the workplace causes the rise in unique employee benefits and changes in cafeteria plans, White, G. (2009). Journal of Management and Marketing Research, 2, 1. The author states the that the forces that lead to workforce diversification are; increase I number of immigrants, mergers or joint ventures with foreign countries, increase temporary and contract worker’s usage and increase in globalization of businesses. The array of benefits to different groups under consideration would be ELS class to employees sponsored school, job sharing, telecommuting, flexible scheduling, child-care flex spending accounts, EAPs, paid family leave and on-sight child care. This paper studies the diverse groups and the designing newer benefits to recruit, retain and motivate employees and that there should be a constant modification of cafeteria plans to maintain their effectiveness.
  • Does the Cafeteria Plan pay off? An empirical research study, Thierry, H., & Croonen, J. J. (1980). Management Decision, 18(6), 303-312. The author presented the general features of a cafeteria plan that include among others the need for gaining more experience with the excellent application of a plan. A cafeteria plan is that every employee in a company has a discretion to choice making each year among the options as to how she would prefer receiving a pre-calculated portion of the income. The annual employee spendable is usually based on salary increase including maturity charges, performance assessments, and others. Also, a more appropriate method in a struggling economy would be allowing employees to relocate apportion of their income to current account based on their agency and preferences. In a promotion case, spendable income is the difference between future income and current income.
  • Leased employment: character, numbers, and labor law problems, Dennard Jr, H. L., & Northrup, H. R. (1993). Ga. L. Rev., 28, 683.  The paper states that the increase in employees leasing popularity has brought problems in realm workers’ compensation, insurance, administration, and dispute resolution. Regulators are anxious to preserve and promote efforts of proper risk grouping and experience rating have faced many challenges when dealing with employee leasing firms. Workers compensation administrators face the task of ensuring that all employers bound by the law are possessing insurance. When businesses utilize their own has possibility employees, this of being an honest assignment.
  • Benefit plans that cut costs and increase satisfaction, Masterson, J. (1990). Compensation & Benefits Review, 22(4), 72-76.  The paper explains a model of employee benefit satisfaction as a construct fro pay satisfaction. Benefit satisfaction contains two constituents namely; satisfaction with the cost incurred and satisfaction with the quality of benefits package. Employees’ needs, values and expectations, benefit availability and the level of coverage, employees experience with the package components and cost arrangement of benefit programs are the determining factors of benefit satisfaction. On the other hand, regulating factors include employer communication, distributive justice, and procedural justice.
  • New proposed cafeteria plan regulations, Dennis‐Escoffier, S. (2008). Journal of Corporate Accounting & Finance, 19(2), 97-104.  The paper outlines the rules to be adopted or arrangements to be classified as a cafeteria plan. They include; cafeteria plan must be a formal written plan that satisfies the requirements of section 125 of IRC and related regulations and is maintained by employers to employees, the plan must include the available benefit explanation, participation and election rules which must be homogeneously applied. A cafeteria cannot differentiate in approving highly salaried individuals as to suitability or benefits, and it cannot issue postponed compensation
  • Choose the right health care account, Siegel, B. H. (2007). Journal of Accountancy, 203(3), 58. The author outlines the flexible spending arrangements, which are the saving accounts funded from income before tax that can be used in payment of medical expenses. Contribution to Flexible spending arrangements also known as flexible spending accounts is made by a reduction in salary. Allocations to reimburse employees for medical expenses are excluded from their income. Flexible spending accounts are exposed to cafeteria plan regulation which includes use-it-or-lose-it regulation, and so account plan must be used before the end of each year failure to which it is lost. Flexible spending accounts must also adhere to non-discrimination rules governing self-insured medical reimbursement plans and is a welfare benefit plan
  • Personal finance education for employees: Evidence on the bottom-line benefits, Garman, E. T. (1997). Journal of Financial Counseling and Planning, 8(2), 1. The paper states the long-term welfare of employers who offer personal finance education to their employees. The poor participation of employees in the 401k retirement plans and fear of lawsuits from former workers based on negligence claims for poor pension plan are the reasons behind the provision of employees’ financial education by employers. Employers are recommended to offer comprehensive personal finance employees education because of low cost and high benefits. The suggested more study on the main benefits of personal finance employees’ education should be having.

Cafeteria style health plans in municipal government, Perry, R. W., & Cayer, N. J. (1999). Public Personnel Management, 28(1), 107-117. There was a study conducted among personnel directors in all municipalities in the USA. Questions’ involving the cafeteria-style health care plans’ use was the basis of the study. The study found that health care cafeteria plan is used by very few cities with larger cities having greater employees’ numbers likely to use the plan. Municipalities’ views vary in the administrative complexity linked with cafeteria plans. The view of complexity is inversely proportional to city sizes. When the workforce increases, cafeteria plans will probably be a progressively popular alternative.

Small Business and The Cafeteria Plan, Calimafde, P. A., & Cohn, D. A. New York University Review of Employee Benefits and Executive Compensation (New York: New York University and Matthew Bender & Co., 2002). The author states that cafeteria plans are the one of the most the employee benefits. Cafeteria re-operated in the following ways; employee pays all which allows the employee to select among various benefits and pay for these benefits by their salary reductions. Plans that are subsidized by employers provide a certain amount of employer dollar which employee distribute among the range of benefits giving priority to health insurance.

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