Under a cafeteria plan, employers do not simply offer a medical plan and other benefits such as term life insurance, but rather give each employee a certain amount of “benefit dollars” equal to the amount the employer spends for that employee’s benefits. The employee then chooses from a menu of benefits that best fit his or her needs. The menu of available options is determined by the employer.A Cafeteria Plan is complex because it changes the way employees receive benefits. Instead of providing a determined set of benefits (such as a medical plan and $50,000 of life insurance), each employee is given an amount of “benefit dollars” roughly equal to the employer’s expenditure for that person’s benefits. The employee then chooses from a menu of benefits and determines those that best fit his or her needs. Of course, the employer determines the available options.For example, an employee with young children may decide to spend his or her benefit dollars on a medical plan with a relatively low deductible and a dental plan that offers coverage for orthodontists. In contrast, an employee with much older children may purchase a relatively high deductible health insurance plan and a large term life insurance policy in order to guarantee the children’s college costs.
In spite of their expense, cafeteria plans provide choice for employees and ultimately save money for employers through efficient plan design and tax savings. (See Qualified Plans; Section 125 Plans).