Cafeteria Plan

Posted in Finance, Accounting and Economics Terms, Total Reads: 650

Definition: Cafeteria Plan

A Cafeteria Plan is a kind of bouquet of benefits in which an employee can select and unselect the desired allowance and benefits as per his/her requirements. 

The same way as a customer in a cafeteria chooses his food/beverage, in the same way, a cafeteria plan enables the employee to select his benefit plan. These plans become more and more useful as diversity is on the increase in workforce these days.

Cafeteria Plans are implemented through following methods:

1.    Premium Only Plan (POP): Employees portion of the company sponsored insurance and other benefits are directly deducted from his/her paycheck before taxes are calculated

2.    Flexible Spending Accounts: Employees set aside a predefined amount on a pre-tax basis to pay for the benefit plan. Employees use the funds in the FSA to pay for benefits such as medical insurance, accident insurance, travel insurance, etc.

3.    Plan Year and Grace period: Many employers design their benefits package in sync with the insurance year known as the “plan year”. “Grace period” is the extra period given after the year has ended to the employees to use the balance remaining in their end of year plan

4.    Uniform Coverage: The employee is reimbursed the amount exceeding his/her contributions till date for qualified medical insurances

5.    Use-it-or-lose-it: All funds left in the FSA of the employee at the end of the year goes back to the employer

6.    Non-discrimination Testing: Tests are conducted to ensure the plans are being implemented in a non-discriminatory manner

7.    Exception: Some employees of the organization are treated as exceptions to the cafeteria plans

Example: The option given to employees to choose from benefits which will be deducted from their paycheck prior to tax deduction. Benefits include medical insurance along with popular options such as SODEXO coupons


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