Lecture 18 Cafeteria Plans

1
Lecture 18Cafeteria Plans

• Reasons for Cafeteria Plans
• Taxation
• Nature of Cafeteria Plans
• Types of Plans
• Obstacles
• Issues in Plan Design

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Reasons for Cafeteria Plans

• Greater appreciation of benefits by employees
• Meet employee needs better
• Cost control

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Taxation

• Section 125 of the Internal Revenue Code applies
• If properly structured, then the employee is not
  taxed on benefits provided through a cafeteria
  plan except to the extent that the benefits would
  normally be taxed (life insurance in excess of
  50,000)

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Nature of Cafeteria Plans

• Permissible benefits
• Medical expenses
• Disability
• Death and dismemberment
• Vacations
• Legal expense plans
• Dependent care assistance
• Group term life
• Choice of medical expense plans does not
  constitute a cafeteria plan unless cash is a
  choice

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Nature of Cafeteria Plans - (cont.)

• Benefit election
• Prior to the beginning of the year
• Changes only for allowed circumstances
• Change in family status
• Change in job status
• Payroll deductions and salary reductions
• Premium-conversion plans
• Flexible spending accounts (FSAs)
• Use it or lose it requirement
• Amounts not taxed under federal and state taxes,
  and under Social Security

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Types of Plans

• Core-Plus plans
• Modular plans
• Choice among several pre-designed plans
• Salary-Reduction-Only plans

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Obstacles to Cafeteria Plans

• Unsettled federal income tax rules
• Meeting nondiscrimination rules
• Concentration test
• Less than 25 of benefits for key employees
• Eligibility test
• Condition for participation rules
• Not discriminatory in favor of HCEs
• Nondiscriminatory contributions and benefits
• Employers obligation to prevent unwise employee
  choices
• Negative attitudes
• Adverse selection
• Cost

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Issues in Plan Design

• Type and amount of benefits to include
• Level of employer contributions
• Premium-conversion or FSA options
• Change of benefits