Why Are Employee Benefits Called a Cafeteria Plan?
Explore the origin behind "cafeteria plan" for employee benefits. Understand the concept of choice and customization that defines these plans.
An employee benefits program known as a cafeteria plan allows workers to choose from a selection of benefits. This type of plan is designed to offer flexibility, enabling individuals to tailor their benefits package to best suit their personal and family needs. The unique name of these plans directly reflects the wide array of choices employees are presented with.
The Core Concept Behind the Name
The term “cafeteria plan” originates from the analogy of a traditional cafeteria, where individuals select various food items from a diverse menu rather than being served a pre-set meal. Similarly, in an employee cafeteria plan, workers are presented with a “menu” of benefit options and can choose which benefits they wish to receive. This contrasts sharply with fixed benefit packages, where all employees receive the same set of benefits. The Internal Revenue Code (IRC) Section 125 governs these plans, allowing employees to choose between receiving taxable cash or non-taxable benefits without the election of cash making the benefits taxable. This specific IRS provision is what enables the unique flexibility and tax advantages inherent in these plans.
How Employee Choices Work
Employees typically make their benefit selections during an annual enrollment period. Through a process known as a salary reduction agreement, employees agree to have a portion of their gross income deducted to pay for their chosen benefits on a pre-tax basis. This pre-tax contribution reduces the employee’s taxable income, leading to lower federal income tax, Medicare, and Social Security taxes. The core mechanism involves choosing between receiving taxable cash compensation or allocating that compensation towards non-taxable qualified benefits. Once selections are made, they generally cannot be changed until the next enrollment period, unless a qualifying life event, such as marriage or childbirth, occurs.
Benefits Typically Available
Cafeteria plans typically include a variety of pre-tax benefits. Common offerings include health insurance, dental insurance, and vision insurance. Flexible Spending Accounts (FSAs) enable employees to set aside pre-tax dollars for qualified medical expenses or dependent care costs. Contributions to Health Savings Accounts (HSAs) are tax-advantaged accounts for individuals with high-deductible health plans. Group-term life insurance and disability insurance may also be available, providing financial protection.