Cafeteria Plans

Frequently Asked Cafeteria Plan Questions

  1. Why do more and more companies seem to be offering cafeteria plans?
  2. How do flexible spending programs work?
  3. Are deposits to a spending accounts free from income tax?
  4. What benefits do flex plans offer employers and employees?
  5. Are there any disadvantages in setting up a flex plan?
  6. What are the legal requirements for maintaining a plan?

Introduction

A cafeteria plan is an employee benefit that is frequently misunderstood. Yet, for those that can appreciate its advantages, the cafeteria plan has become a highly desirable employee benefit in light of the recent changes in the economic and tax scene.

Although originally sanctioned by Congress in 1978, under Section 125 of the Internal Revenue Code, cafeteria plans have only recently come into vogue, as companies look for ways to reduce some of the expense of providing medical coverage for their employees. A cafeteria plan (also called a “flex plan”) can save employees money, as well, by allowing them to purchase some of their medical coverage with “pre-tax” dollars.

Flexible Benefit Plans

In a flexible compensation program a specified amount of pay is offered by an employer for the purchase of employee benefits. An employee is provided with a number of benefit options which can be selected.

An employer in such a plan defines its commitment in terms of its contributions to the benefit program rather than in terms of a fixed program of benefits. This effectively creates compensation that is visible to employees. Employees are permitted to select benefit programs that fit their personal needs rather than being covered by a “common program.”

A flexible spending account is created for each participating employee. The account is a reserve that is available to reimburse employees for certain expenses not covered under group insurance programs. Such expenses include health care expenses, such as deductible or coinsurance amounts, and work-related dependent-care expenses.

Flexible spending accounts can be an option under a broader flexible program, or they can be the only element of flexibility in a benefit program. Deposits to the spending accounts are funded by employer or employee contributions; the accounts supply funds that are available for reimbursement of eligible expenses during the full plan year. Neither the amounts deposited nor the amounts withdrawn by employees as reimbursement for eligible expenses are considered taxable income.

Benefits And Drawbacks

Flex plans offer a number of benefits to both employers and employees. Basically, employers can offer their employees a more attractive benefits package at little or no additional cost; and employees can choose how and where to put their hard-earned dollars to work for them, as appropriate to their individual needs.

Reporting and Disclosure

The law requires that benefit plans be created and administered in accordance with a written plan document that details certain information. The written plan document can incorporate by reference the plan documents for any benefits that are provided to employees under separate written plans. If the plans provide different maximum coverage levels, they must be specified.

Generally, the plan document provides a description of benefits, participation rules, election procedures, employer contributions and the plan year.

There can be separate plan documents for a 401(k) plan and other programs such as accident and health, dependent care, group legal services, etc.; separate plan documents are required for health care and dependent care flexible spending accounts.

Annual Reports

The Internal Revenue Service and the Department of Labor require the filing an annual report (Form 5500 series). The information in the annual report should also be summarized and made available for plan participants.

NOTE: Small plans that have less than 100 participants and meet certain other rules may not be required to file annual reports.

Summary Plan Descriptions

A summary plan description (SPD) is a description of the flexible benefits plan, written in plain English, and made available to participants and designated beneficiaries.

Cafeteria Plans At-A-Glance

  1. The cafeteria plan has become a highly desirable employee benefit in light of recent changes in the economic and tax arenas.
  2. In a flexible compensation program a specified amount of pay is offered by an employer for the purchase of employee benefits.
  3. Flexible spending accounts can be part of a broader flex program, or they can be the only flex option in a benefit program.
  4. Employee deposits to (or eligible withdrawals from) spending accounts are not included in income for income tax purposes.
  5. Flex plans offer a number of benefits to both employers and employees.
  6. Although generally beneficial to both employee and employer, flex plans do pose certain disadvantages to the employee.
  7. The IRS and the DOL require the filing of annual reports (Form 5500 series).
  8. The information in the 5500s must be summarized and made available to plan participants.

Forms and Checklists

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