About Cafeteria Plans
What do Cafeteria Plans do?
They give the employee a choice. They let the worker convert a taxable benefit into a non-taxable benefit. They involve tradeoffs.
Back to Top
What are the goals of a Cafeteria Plan?
Enhance cost control and efficiency by giving the employees choice along with cost responsibility. As the employees become able to shop the benefit menu with their money, the cost of their choices become apparent.
Employees begin to
- Eliminate unneeded or unwanted benefits
- Avoid duplication of benefits between their and their spouses' plan
- Tailor the plan to their needs
Employers can
- Eliminate mandates
- Budget for benefits
Save the employer from having to sort through from the many available benefit choices for one that fits the employees as a group. The employer can budget for benefits without figuring the intra-year rate changes that come from the various carriers.
Attract better employees because they
- Have a greater array of benefits from which to choose
- Can choose benefits that best suit their family status
- Can adjust benefit levels according to contingencies
- Gain a sense of control with flexible benefits
Back to Top
What approaches can I use?
All Section 125 plans are regulated the same. Different levels of plan implementation require the same regulatory oversight.
The major differences are
- type of benefits offered
- approach to employer contributions used
There are two primary approaches to employer contributions:
The Cost Sharing Approach
The amount of employer contributions to employee contributions is recognized and may or may not be established and fixed concurrently with the adoption of the cafeteria plan. This is one of the employer's choices of plan design.
Typically, the employer continues to contribute the same amount toward the employees' purchase of these established benefit plans without any change during the year of implementation. This sets the stage for future cost shifting to the employees without affecting the conversion year.
Since the amount of employer contributions is fixed, future premium increases are absorbed by the participating employees.
The Benefit Credit Approach
The amount the employer is currently paying toward various specified benefits is converted into benefit credits. These benefit credits are then allocated to employees (using various methods). The employees purchase benefits using their employer-provided benefit credits.
Employee provided benefit credits are acquired through the employee's salary conversion, in event that the chosen benefits cost more benefit credits than provided by the employer.
In some cafeteria plans, the employee can also convert extra vacation time into credits to be used for other benefit choices.
Back to Top
What are the types of Cafeteria Plans?
Basically there are three types of Cafeteria Plan: Premium Only Plans (POP), Flexible Spending Accounts (FSA) and Full Flex.
Premium Only Plans (POP) -- Level 1
At this implementation level, the employee may only place qualified insurance premiums under the Cafeteria Plan.
Employees may choose to pay for their qualified premium benefits with pre-tax dollars through paycheck reductions instead of after-tax dollars through paycheck reductions. This is accomplished by an employee salary reduction agreement.
This is the simplest form of Cafeteria Plan. All employers should be offering at least this level of implementation.
POP Plan Flowchart
Premium Only and Flexible Spending Accounts (FSA) -- Level 2
At this level, the employee may choose to set aside pre-tax dollars (through salary reduction agreements) to pay for
- Dependent Care, when needed for the employee to be able to work
- Medical Expenses not paid by insurance
- Premium Reimbursement Plans for individually owned medical policies
This implementation level requires significantly more administrative effort than required for premium conversion plans or POPs.
FSAs require additional administrative activities to manage individual participants' flexible spending accounts including
- processing claims
- writing reimbursement checks
- increased employee communications
Most employers seek TPA services at this level.
FSA Plan Flowchart
Full Flex Cafeteria Plans -- Level 3
Full Cafeteria Plans include POPs plus FSAs plus flex credits. Under a flexible credits approach, each employee uses credits to purchase benefits from a menu of options. If the employee does not have enough employer credits to purchase all the benefits required for their family needs, the employee may purchase them through salary reduction, as in the first two implementation.
This level of implementation is the most complex during plan design and installation. Full flex plans require much more employee communication and enrollment preparation.
The actual administration of this level of plan is not significantly different than that required to administer Level 2 plans involving the FSAs.
The main difference here involves benefit credits or dollars that are contributed by the employer. Although much is written about this level of implementation, this level is usually implemented by employers that have several thousand employees.
Credits granted may be based on family status such as married, single, single with one dependent, etc. Administrators should take care not to base credits upon level of compensation, length of service, or job title.
Core Flex Plan Flowchart
Modular Flex Plan Flowchart
Full Flex Plan Flowchart
Back to Top
Interested? Learn more: 800-633-3841
Back to Main Products Page | Back to Main DataPath125 Page
|
