Cafeteria Benefits Plans: Offering Choices to Employees - dummies

Cafeteria Benefits Plans: Offering Choices to Employees

Cafeteria plans are benefit plans that offer employees a choice of benefits based on cost. Employees can pick and choose from those benefits and put together a benefit package that works best for them within the established cost structure.

Cafeteria plans are becoming more popular among larger businesses, but not all employers decide to offer their benefits this way. Primarily, this decision is because managing a cafeteria plan can be much more time consuming for the bookkeeping and human resources staff.

Many small business employers that do choose to offer a cafeteria plan for benefits do so by outsourcing benefit management services to an outside company that specializes in managing cafeteria plans.

For example, a company tells its employees that it will pay up to $5,000 in benefits per year and values its benefit offerings this way:

Benefit Amount
Health insurance $4,600
Retirement $1,200
Child care $1,200
Life insurance $800

Joe, an employee, then picks from the list of benefits until he reaches $5,000. If Joe wants more than $5,000 in benefits, he pays for the additional benefits with a reduction in his paycheck. The list of possible benefits could be considerably longer than the items shown above.

In this case, if Joe chooses health insurance, retirement, and life insurance, the total cost is $6,600. Because the company pays up to $5,000 annually, Joe needs to copay $1,600, a portion of which is taken out in each paycheck. If Joe gets paid every two weeks for a total of 26 paychecks per year, the deduction for benefits from his gross pay is $61.54 ($1,600 ÷ 26).