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Cafeteria plan

1. Managed care plan offered by an employer to his or her employees that allows them to select the type and amount of benefits from a “menu” of different options the employer offers such as health care, life insurance, vacation, and disability insurance. Some cafeteria plans give an employee a certain number of benefit “points,” which can be used to purchase one or all of the benefits offered by the company. An employee who did not want to participate in a health plan could apply more points toward a 401(k) plan, life insurance, or any other benefit offered. Under some plans, the credits can be redeemed for cash. The employer pays for the plan with before-tax dollars. Also called flexible benefit plan, flex plan, or flexible compensation. 2. See Section 125 of the Internal Revenue Code.

Cafeteria Plans

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).