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Check out our weekly blog posts and see the latest news and discussions happening in the HR world of business.

Is a Cafeteria Plan Right for your Employees?

Today, we wanted to chat about cafeteria plans. What is it, why choose it, how can you do it, and perhaps most importantly, is it a good option for your employees?

What is it?
Rather than a program for helping your employees better select their lunches (although some would argue that Sharon in accounting could benefit from changing up her tuna salad habit!), a cafeteria plan is buried in section 125 of the US Tax Code (so, super accessible and generally one that few people are going to skip over!!). According to the IRS, a cafeteria plan “provides participants an opportunity to receive certain benefits on a pretax basis,” and that generally includes federal tax, social security tax, and most of the time state tax! Further, these participants can select from “at least one taxable benefit (such as cash) and one qualified benefit,” which the IRS defines as a benefit that “does not defer compensation and is excusable from an employee’s gross income.” In general, it’s just a flexible plan that allows employees to put their pre-tax dollars in the places that matter most, such as accident assistance, select health benefits, health savings accounts, adoption assistance, dependent care assistance, and group-term life insurance coverage, among others.

Who’s eligible?
In general, employees, their spouses, and their dependents (so the usual crew to which you provide benefits) are eligible for cafeteria plans. The IRS notes that former employees are sometimes also eligible, although certain conditions have to be met.

How do you offer it?
In order to offer a cafeteria plan, you have to have a written plan in place that outlines the participant’s rights and benefits, their obligations when participating in the plan, and a description of the terms and conditions for administering the plan and this all has to be in addition to your ERISA documents. Further, before administering the plan, you and your employee need to reach an agreement on how much pre-tax earnings they plan to withhold – at this time, those in the know suggest that workers only withhold as much as they intend to use since they could forfeit or owe money in if their calculation is off.

Is it a good choice for your employees?
A cafeteria plan is almost always viewed favorably by employees. This is especially true if you have a diverse workforce – particularly when it comes to ages – and folks are in different life stages or social circumstances. For example, an employee with a young family may love the idea of being able to use pre-tax dollars to pay down their daycare expenses, while an older employee may relish the opportunity to elevate their existing health benefits plan to include more comprehensive prescription coverage or even a fancy suite of wellness offerings. In short, it allows your employees to pick and choose what matters most to them – and make change along the way as their wants and needs change.

Is it a good choice for your business?
One perk is that because the pre-tax benefits aren’t subject to FICA or workers’ comp premiums, you may actually save a little money! Plus, in a tight job market, being able to say that you offer a cafeteria plan can help pump up a compensation package and make you more attractive both to existing and potential employees because they get to select the benefits that matter most to them without sharing in the cost of benefits that they would never use or want.

What are the drawbacks?
One of the drawbacks is that it’s a little tedious to administer. Employers must stay in contact with workers and notify them about the cost of the various benefits, their usage to date of the benefit, and any other changes to the plan that may impact its use or the employee’s ability to derive benefit. Now, much of this drawback can be assuaged if you manage your benefits with a PEO, and more specifically a PEO with a benefits administration system that allows employees to log their own usage and receive real time notifications about changes to their plans! Want to know more about cafeteria plans and how a PEO can administer that for you? Give us a call at 609.860.0400 to learn more!

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