Cafeteria plan

Cafeteria Plan (or cafeteria system) - is a benefit plan offered to the employee, in which he or she can choose pre- tax benefits from the list. Employees are permitted to contribute a percentage of their gross income prior to calculation and deduction of any taxes. Such cafeteria plans usually provide benefits, for instance, insurance benefits, retirement benefits or any other, that may help the worker in the daily life. Qualified cafeteria plans are excluded from gross income. As workforce diversity increases and workers look for more individualized benefits that are catered to their requirements, these plans become increasingly beneficial. Flexibility of the cafeteria plan give people opportunity to choose benefits based on their particular needs. For instance, if we take an employee, who has an big family, a health plan with a wide coverage would be a most suitable option for him or her.

History of the notion

This notion got its name from the similar plans that were presented earlier, that also allowed employees to choose which benefits they prefer more, which was close to the customer picking up the favorite position from the cafeteria. The history of this notion is following. It was presented by the Thomas Ellsworth Wood of Hewitt Associates, who was also the chairman of the Corporate Board for the International Foundation of Employee Benefit Plans. Once he announced, that the universal program of benefits was not able to do the job any longer. Growing globalization and dynamism of American households and enterprises were the reasons he invented flexible compensation. The ideas he developed included creating a fundamental "safety net" of benefits to protect against the financial risks connected with old age, death, disability, and catastrophic medical costs, with supplemental benefits offered on a defined contribution basis (Walker, 1983).

The first step that the employee should do is to calculate, how much money does he or she is willing to provide to their cafeteria plan. Then this amount of money is divided by the number of payroll periods. And after it is subtracted from every paycheck, while the cafeteria plan is use.

The case to imagine: Max has chosen 2000$ for his medical care expenses. He spent only 1500$ out of the full amount, so the rest of the amount of money will be renounced. But if he would exceed that “budget”, he would have had to pay the exceeded amount of money has to be paid by himself.

Cafeteria arrangements are more complicated and time-consuming to run because of their unique configuration. Employers are required to keep all employees informed of any changes to the cost, coverage, and utilization of benefits. Continuous administration may be necessary due to an employee's changing circumstances. This can be partially fixed by limiting how frequently employees can change their perks. For instance, a corporation can restrict employees from altering the features of their cafeteria plan more than once each year. The employer suffers a loss if an employee takes full advantage of their plan and quits the company before making their yearly contribution.

Advantages of cafeteria plan

The advantages of the cafeteria plan are following:

• Reduce in the tax obligation of the employee (employee, that contributes money to the cafeteria plan, has reduced their gross income, hence he or she has less tax deductions)
• Employees are able to choose from nontaxable as well as taxable benefits under their cafeteria plans
• Wide variety of options to choose from, which addresses needs of the worker
• Better relationship between employer and employee

Disadvantages of cafeteria plan

The disadvantages of the cafeteria plan are following:

• Cafeteria plan usually takes more time to administer and is typically more complex
• Some of the benefits presented, can be used only for limited period of time
• Complicated process of changing the chosen benefit during the year
• It may be needed more financial liquidity for some businesses
• In some cases, cafeteria plan can imply more costs for the enterprises

References

• Ali, B. J., & Anwar, G. (2021), An Empirical Study of Employees’ Motivation and its Influence Job Satisfaction, "International journal of engineering, business and management"
• Bohlander, George and Snell, Scott. (2010), Managing Human Resources, "Thomson publishing"
• Cole, Louise, Gale, Fister, Greengard, Samuel. (2003), 25 trends that will change the way you do business, "Workforce"
• Feeney, Sheila. (2003), Employees find a field of family-friendly benefits, "Workforce"
• Humphrey, Sheri L. (2013), Work life balance, "Essence publishing"
• Mark A. Hall,Christie L. Hager,David Orentlicher. (2010), Using Payroll Deduction to Shelter Individual Health Insurance from Income Tax , "Health services research"
• Shuitt, Douglas P. (2003), Are you ready for paid family leave?, "Workforce"
• Thierry, H. and Croonen, J.F. (1980), Does the Cafeteria Plan Pay Off?, "Management decision"
• Walker, Ruth. (1983), Cafeteria pension plans balance the now against later, "The Christian Science Monitor"

Author: Kseniia Zalyvadna