Some employers offer their employees a benefit plan where they can choose from a wide selection of benefits rather than a pre-selected menu. This allows each employee to put together the combination that best serves their needs. Cafeteria plans are of particular benefit to smaller businesses, but also show up at larger firms from time to time. A cafeteria plan may also be called a flexible benefit plan.
With a cafeteria plan you may be offered cash, health insurance, assistance with childcare, contributions to a retirement account, paid leave, life insurance and more. The employee evaluates all the options and puts together a package that addresses their goals. If the individual is planning a family in short order then they may choose child care, health insurance and paid leave. Someone nearing retirement age may opt for life insurance and contributions to a retirement account.
Companies fund their cafeteria plans through reimbursement accounts into which employees pay to receive their benefits. Each employee can determine how much they want to put into the plan, limited by income and other restrictions imposed by the employer. Since these funds are pre-tax income, neither the employer nor the employee are taxed in the same way as they are for regular wages. The employer reduces their payroll taxes while the employee pays less income tax.
A cafeteria plan is a good place for a company to start when they begin to offer employees benefits. It offers more choices while simultaneously allowing individuals to tailor their plan to their individual needs This flexibility can encourage workers to stay with their employer rather than accepting a more rigid option elsewhere.