A growing number of business owners are providing flexible benefits through a Section 125cafeteria plan as one method of attracting and retaining their employees. Generally, under this plan, a menu of choices is offered to employees, while providing employers with a cost-effective way to offer a variety of benefits.
If you are thinking about offering a cafeteria plan at your business, you may wonder how to design a plan that satisfies employees, yet is manageable and economically feasible for your business. Be sure to review all of your options with a qualified professional to determine which benefits to include on your menu.
Here are some employee benefits to consider:
- Group-term life and disability income insurance benefits
- A choice of health insurance plans
- Elective 401(k) retirement plan contributions
- Flexible spending accounts (FSAs) for unreimbursed medical and dependent care expenses
- Trade-offs between certain benefits and either additional time off or cash
In the most effective plans, both the business and the participating employees share in the cost of optional benefits. Typically, the employee’s portion of the cost is made with pre-tax dollars in the form of a salary reduction. This type of arrangement benefits employees because contributions are typically not subject to employment taxes, including Federal, state, or local income taxes, as well as Social Security and Medicare taxes.
Employees may also appreciate cafeteria plans because they can choose benefits according to their specific needs. Each benefit may be priced “a la carte,” using a system of credits, with some benefits costing more than others. Employees may use their cafeteria plan credits for the benefits they need most. For instance, an employee who is covered under a spouse’s health plan will not need health insurance and may choose another benefit in its place.
Employers also benefit from cafeteria plans because they are able to provide a no- or low-cost benefit to attract and retain employees, and the reduction in employees’ taxable wages with such plans generally reduces Social Security, Medicare, and Federal unemployment taxes paid by the business.
It is important to select a menu of benefits that provides enough choice to meet employer and employee objectives without building a system that is too complicated to administer. Too many choices can create errors, particularly in calculating credit use, as each credit is priced differently. As you and your employees become more familiar with the way the plan works, new options can be added. A properly designed and implemented cafeteria plan can help provide benefits for both employers and employees.