1. Lecture 18 Cafeteria Plans
Reasons for Cafeteria Plans
Taxation
Nature of Cafeteria Plans
Types of Plans
Obstacles
Issues in Plan Design

2. Reasons for Cafeteria Plans
Greater appreciation of benefits by employees
Meet employee needs better
Cost control

3. 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)

4. 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

5. 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

6. Types of Plans Core-Plus plans Modular plans
Choice among several pre-designed plans
Salary-Reduction-Only plans

7. 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
Employer’s obligation to prevent unwise employee choices
Negative attitudes
Adverse selection
Cost

8. Issues in Plan Design Type and amount of benefits to include
Level of employer contributions
Premium-conversion or FSA options
Change of benefits