Definition
A Cafeteria Plan is a flexible employee benefit plan offered in the United States that permits employees to choose from a variety of pre-tax benefit options. The name “cafeteria plan” stems from the concept of a cafeteria where individuals have various food choices—a cafeteria plan offers employees various benefit choices. These plans are governed under Section 125 of the Internal Revenue Code, which allows employees to exclude chosen benefits from their gross income solely because they have a choice among benefits.
Examples
Example 1: Health Insurance
An employee can choose to receive health insurance coverage through the cafeteria plan. The cost of the health insurance premium is deducted from the employee’s paycheck on a pre-tax basis, reducing their gross taxable income.
Example 2: Dependent Care Assistance
An employee chooses to allocate part of their salary to a dependent care Flexible Spending Account (FSA). The selected amount is deducted from their paycheck before taxes, helping the employee save on child care expenses while reducing taxable income.
Example 3: Cash Option
Some cafeteria plans allow converting unused benefits into cash payments. For example, if an employee decides not to enroll in the company’s health insurance plan because they are covered under a spouse’s plan, they may receive additional taxable cash compensation.
Frequently Asked Questions (FAQs)
What benefits can be included in a cafeteria plan?
Cafeteria plans may include health insurance, life insurance, disability insurance, vision and dental benefits, Flexible Spending Accounts (FSAs), Health Savings Accounts (HSAs), and sometimes even cash compensation.
Is the cash received from a cafeteria plan taxable?
Yes, any cash option chosen under a cafeteria plan is considered taxable income and must be included in the employee’s gross income.
Can employees change their benefit choices during the year?
Generally, employees make their benefit choices during open enrollment, and these choices stay fixed for the plan year unless a qualifying life event occurs, such as marriage, birth of a child, or loss of other coverage.
Do cafeteria plans save employees money?
Yes, cafeteria plans can save employees money by allowing them to pay for benefits with pre-tax dollars, lowering their overall taxable income.
Who is eligible to participate in a cafeteria plan?
Generally, any employee of a company offering a cafeteria plan can participate. However, specifics like part-time employment and the probationary period for new hires can affect eligibility.
Related Terms
Fringe Benefits
Fringe benefits are additional benefits supplementing an employee’s salary, which include things such as health insurance, educational assistance, retirement plans, and in some cases, company cars. These might be included in a cafeteria plan.
Flexible Spending Account (FSA)
An FSA is a pre-tax, employee-funded account used for qualified medical or dependent care expenses. The contributions to an FSA are deducted from an employee’s paycheck before taxes.
Health Savings Account (HSA)
An HSA is a tax-advantaged account that individuals with high-deductible health plans (HDHPs) can use to pay for qualified medical expenses.
Online Resources
- IRS Publication 15-B: Employer’s Tax Guide to Fringe Benefits
- Internal Revenue Service (IRS) - Cafeteria Plan Overview
Suggested Books for Further Studies
- “Employee Benefits Design and Planning: A Guide to Understanding Accounting, Finance, and Tax Implications” by Bashker Biswas
- “The New Health Insurance Solution: How to Get Cheaper, Better Coverage Without a Traditional Employer Plan” by Paul Zane Pilzer
- “Flexible Benefits Answer Book” by Trisha Springstead, Diana G. Medlin
Accounting Basics: “Cafeteria Plan” Fundamentals Quiz
Thank you for embarking on this journey through our comprehensive accounting lexicon and tackling our challenging sample exam quiz questions. Keep striving for excellence in your financial knowledge!
