What Is a Cafeteria Plan From an Employer-Sponsored Health Insurance Plan?

A cafeteria health care plan is an employer-sponsored plan set up under Section 125 of the Internal Revenue Code. It allows employees to choose from a variety of benefits and coverage levels, and allows the employer to save on employment benefit costs. Cafeteria plans give employees a more customized benefit package that meets their particular family situation and needs.

Inclusions in a Cafeteria Plan

• Several benefits can be offered through a cafeteria plan. Employers can choose which benefits to offer as they design the plan to fit their company. Common inclusions are group health and disability insurance, group life insurance, vacation benefits, dental coverage, and accidental death and dismemberment insurance. Specific exemptions from inclusion are transportation benefits, employee discounts and educational and training benefits. 401(k) plans are allowed in a cafeteria plan, but the complexity of the rules of inclusion usually result in 401(k)s not being offered.

Advantages

• There are two main advantages to a cafeteria plan for an employee. The first is the tax benefit. The benefit package can be utilized without it being taxed as employment income. As benefits can represent a large portion of an employee's salary, this can save a substantial amount of money. The second benefit is that the employee can pick and choose from the various options and coverage levels to customize the plan. For example, if no one in the employee's family wears glasses or contacts, the employee can exclude vision coverage and choose something else more tailored to her lifestyle.

How Does it Work?

• Most cafeteria plans have a basic level of coverage, offered to all employees. Each employee receives a certain number of additional credits with which they can purchase enhanced coverage or new benefits under the plan. For example, an employee might be able to choose a higher level of life insurance coverage, or add dental coverage to his package. Some plans allow the employee to purchase even further coverage through before-tax withdrawals from her paycheck.