Company-sponsored type of employee benefit plan called a “cafeteria plan” and you inquired as to whether this type of plan would work for your company. In order to help you decide whether a cafeteria plan would be suitable for your company, we thought we would first explain what a cafeteria plan is and how it works.

A cafeteria plan (which is also referred to as a “flexible benefit” plan or a “flex plan”) is an arrangement an employer may sponsor under which employees are permitted to choose between certain nontaxable benefits offered by the employer (for example, health insurance, life insurance, medical flexible spending plans, dependent care assistance, etc.) and taxable benefits (typically cash) without being taxed on the potential to receive cash. If you choose to sponsor a cafeteria plan, the plan must be set forth in a written plan document.

As the employer sponsoring the plan, you can choose the types of benefits offered under a cafeteria plan. However, the nontaxable benefits you offer have to fall under the category of “qualified benefits.” Qualified benefits under a cafeteria plan are certain benefits that are excludable from an employee’s income under a specific provision in the Internal Revenue Code.

A cafeteria plan can be funded with employer contributions, employee contributions, or a combination of both. When a cafeteria plan is funded partially with employee contributions, employees authorize the contributions by signing salary reduction agreements. When employee contributions through salary reduction agreements are used to fund the plan, it will mean that the employee will report a lower taxable income and consequently pay less tax. As for any contributions made by the company as an employer, the company will be able to deduct that amount from its taxable income.

Employees typically choose their benefits once a year. Specific rules govern when employees can make their benefit elections, the amount(s) allowed to be elected, and under what circumstances they will be permitted to change their elections. Recent regulations have expanded the group of events that may generate changes in employee elections; included are divorce, birth, adoption, marriage, death, and now when there is a significant increase or decrease in the cost of benefits or an improvement in the coverage provided.

Now that we have provided you with an overview of how these plans work, please feel free to contact us if you have more questions and/or if you would like to establish a cafeteria plan for your company.