Benefits

What Are Flexible Benefit (AKA Cafeteria) Plans?

Flexible benefit plans (also called cafeteria plans) offer employees multiple choices of benefits that are paid for by salary contributions on a pretax basis. These plans give employees a choice of which benefits they would prefer to take, and they also give employees the choice to forgo the benefit and take a cash option instead.

When an employee takes and makes a contribution toward a benefit—such as a payment for the employee portion of an insurance plan premium—that contribution is deducted from wages and is not subject to taxation at the federal level. This is one of the biggest benefits of a flexible benefit plan and one of the key reasons so many employers opt to provide such a benefit option.

Even if the employer opts to pay the cost of the benefit and no employee contribution is required, as long as other criteria are met, the amount that the employer pays on the employee’s behalf is still usually a nontaxable benefit.

If the employee opts to forego the benefit, he or she will be able to receive a cash benefit as defined in the program—but that cash benefit would no longer carry the tax reduction.

What Are the Components of a Flexible Benefit Plan?

As long as the plan meets the criteria outlined by the Internal Revenue Service (IRS) to qualify under its flex plan guidelines (outlined in section 125 of the Internal Revenue Code), there is some latitude in terms of what exact benefits can be offered[i].

These types of plans are often used in the context of health insurance, but this is certainly not the only application. Here are several of the most common types of benefits offered in a flexible benefit plan:

  • Health insurance
  • Life insurance
  • Childcare services
  • Dental and/or vision insurance
  • Vacation days
  • Adoption assistance
  • Health savings accounts, which could be used for medical expenses or care services that are not covered by other health insurance coverage
  • Flexible spending accounts
  • 401(k) contributions
  • Elder care

Benefits of Flexible Benefit Plans

One of the major benefits of flexible benefit plans was already mentioned above: the premiums paid by employees into these plans are typically eligible for preferential tax treatment. In other words, the money spent on these benefits is typically money that is taken from the paycheck on a pretax basis, thus lowering the employee’s (and the employer’s) tax liability. This can be seen as a big benefit for some, as it can increase take-home pay. This allows employers to provide benefits at a lower total cost, since both employee and employer benefit.

Another benefit of these plans, as the name implies, is flexibility. Employees are free to select the benefit(s) they find most useful to their unique situation. For example, some employees may need childcare benefits while others would strongly prefer to have increased retirement benefits. Benefits are tailored to individual needs, which can improve employee satisfaction.

From the employer standpoint, this flexibility also means that employers can save money by not spending on benefits that individual employees do not value. This type of plan setup may allow smaller employers a way to offer more benefits without excessive expenditures.

Last, but certainly not least, these types of plans, like most benefits, can be used to recruit talent.

Does your organization offer flexible benefit plans? What has been your experience?

*This article does not constitute legal advice. Always consult legal counsel with specific questions.

[i] See the IRS website for further details: http://www.irs.gov/Government-Entities/Federal,-State-&-Local-Governments/FAQs-for-government-entities-regarding-Cafeteria-Plans

 


About Bridget Miller:

Bridget Miller is a business consultant with a specialized MBA in International Economics and Management, which provides a unique perspective on business challenges. She’s been working in the corporate world for over 15 years, with experience across multiple diverse departments including HR, sales, marketing, IT, commercial development, and training.