A cafeteria plan is a sure form of worker profit plan the place employers provide their workers quite a lot of completely different pre-tax profit choices from which they could select. That is generally additionally known as a versatile advantages plan. With a cafeteria plan, workers contribute a certain quantity of pre-tax revenue in alternate for accessing sure mixtures of advantages, reminiscent of life insurance coverage, medical insurance, and incapacity insurance coverage, they will then entry at this pre-tax price.
How does a cafeteria plan work?
Cafeteria plans enable workers to make use of pre-tax {dollars} to pick out from quite a lot of 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 could even embrace issues like adoption help advantages or money advantages.
What are some great 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, choosing a strong well being plan at a time after they should be accessing numerous well being care providers for his or her household, or spending much less on medical insurance however extra on 401k matching at occasions when that makes extra sense for them.
Due to the way in which it makes use of pre-tax {dollars}, a cafeteria plan additionally reduces a given worker’s quantity of taxable revenue for a given tax 12 months.
What are the disadvantages of a cafeteria plan?
One essential issue to bear in mind 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 12 months. And any pre-tax {dollars} not spent on cafeteria advantages in a given tax 12 months are forfeited if not used. For instance, if somebody decides to contribute $3000 to a HSA for a given 12 months, however finally ends up solely having $2000 in well being care prices, then they are going to have misplaced $1000 pre-tax {dollars}.
Additionally essential to bear in mind is that if an worker opts for any form of taxable profit like money, then might be chargeable for that profit on their annual revenue taxes.
Due to their complexity, a cafeteria plan is extra burdensome and tough for an employer to handle, though it might have monetary advantages for an employer due to using an worker’s personal pre-tax {dollars}.