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A Successful Cafeteria Plan Provides “Just Desserts”

| February 26, 2018
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For James Franklin, the owner of Franklin Electrix, Inc., an electronics manufacturing company in Omaha, NE, one of the answers to satisfying and retaining his valuable employees is to develop a flexible benefit plan. Commonly referred to as a cafeteria plan, it would allow his employees, within limits, to choose their benefits, including health insurance, pension options, dental coverage, etc.

One of the challenges facing Franklin and other business owners considering this option, is to design a cafeteria plan that satisfies employees, yet is manageable and makes sound economic sense. Among the choices typically available are: medical plan options that offer high benefits at high cost or low benefits at low cost; supplemental life insurance for the employee and his or her dependents; optional 401(k) retirement plan contributions; spending accounts for unreimbursed medical benefits and dependent care; and trade-offs of benefits not needed for additional vacation time or cash.

In the most effective plans, both the business owner and participating employees usually share in the cost of optional benefits. The business owner’s contribution often takes the form of spending credits. The amount of credit for a particular benefit depends on the strategy a business owner selects to influence an employee’s choice of that benefit. Using the credit system, business owners signal their commitment to fund a benefit plan, while also setting a definite limit on what they will pay.

A major challenge in designing a successful benefits program is in pricing the credits and choosing the benefits to offer your employees. Yes, you want to offer attractive benefits, but you also want to keep practical accounting controls on the costs. Surprisingly, some of the benefits that employees find most attractive are the same ones that work to control and stabilize a company’s financial commitment. For example, many employees may appreciate a 3% of pay 401(k) plan match much more than a 6% of pay defined benefit pension; because of the savings, so may employers.

The most well-received cafeteria plans are those that include: various life insurance benefits; a choice between traditional medical benefits and an HMO; a dual choice option offering co-insurance for those covered by a spouse’s plan; and employee-funded spending accounts for unreimbursed medical expenses and dependent care expenses, such as child care and elder care.

Employees also like supplemental insurance for dependents and a 401(k) capital accumulations plan in addition to the basic pension. Many business owners also offer managed care options, such as a higher-percentage reimbursement at specific preferred providers, which can be added to—or substituted for—the traditional health coverage.

The dual choice option for co-insurance is a good example of how flexible options can benefit both you and your employees. At a lower cost than full coverage, the option would cover only those amounts otherwise excluded under the deductible and co-insurance provisions of the spouse’s medical plan. Employees would receive the additional coverage they want, plus a credit for choosing a lower-cost plan. In addition, your company would receive a reduction in overall cost and reduced exposure to potential liabilities.

Selecting a menu of benefits is an exercise in providing enough choices to meet employer and employee objectives without building a system too complicated to understand or administer. Keep the program simple; too many choices can produce errors, particularly in calculating the credit use, since each credit is priced differently. As you and your employees become more familiar with the way the chosen plan works, new options can be added that would be acceptable to both employer and employee.

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