Everything You Need To Know About Cafeteria Plans

Everything You Need To Know About Cafeteria Plans

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The competition for talent is a real phenomenon. Whilst remuneration might be a lead deciding factor for those considering a move to a new organisation, the benefits on offer can also sway the decision of a potential hire. A survey conducted by remuneration research company Glassdoor in 2017 showed that 79% of employees would rather have added benefits as opposed to a pay increase. Whilst some of the most highly rated benefits include Medical Aid and school fees allowance, employee benefits do not necessarily have to be a high cost for business. A way of managing and customizing benefits would be to introduce the cafeteria plan.

Employee benefits are designed to help promote employee satisfaction and well-being. The purpose of providing employee benefits is to initially increase the economic security of staff members, resulting in, improved worker retention throughout an organisation. Employees who are constantly worried about finances will rarely be productive at work. Benefits allow the employer to take on some of the burdens and enables employees to save money and add to their disposable income.  This then contributes to improving their working well-being and maintain a better work-life balance resulting in high levels of motivation and engagement.

Benefits do not only work in the employees' favour but also advance the cause of the business. For starters employees are more likely to show up to work when they have benefits. Three major reasons for absenteeism in the workplace are finances, family commitments, and health issues. Benefits such as flexi-time and medical aid have proved to reduce absenteeism in these areas. Benefits also improve the quality of hires for the business. A survey found that 55% of employees are at least somewhat likely to accept a job with slightly lower pay if it has better benefits (AFLAC, 2016). The advantages of having company benefits can provide an organisation with a competitive edge compared to other organisations that do not provide employee benefits. Offering employee benefits within an organisation is important as it shows employees that employers are invested in their overall health and their future well-being.

For businesses no doubt the cost of offering benefits can add up to a substantial amount. The Bureau of Labor Statistics (USA) late in 2018 found that the average cost of benefits for employers adds up to a nearly 50 per cent increase in payroll expense. A one size fits all approach to benefits cannot apply across the board as businesses have different affordability’s taking into account size and industry. The same also applies to employees in that the workplace has inter-generational individuals so a standardised benefits plan will not have the same appeal to everyone. An example would be Flexi-work time benefits might appeal more to parents and less to the younger generations who would likely prefer on-site work with their peers. In an attempt to cater to everyone, one solution would be to introduce a cafeteria plan.

A cafeteria plan also called a flexible benefits plan, allows employees to choose from a menu of optional benefits the ones that best fit their individual needs. Thus, employees can customize their benefits packages. In cafeteria plans, benefits mandated by law, company policies or labour agreements such as social security are supplemented by a list of other benefits to which employees can subscribe. Employees' choices of optional benefits are limited only by the total benefit dollars available and the variety of benefits offered by the employer. As a general guide, the list of choices must contain at least one taxable and one non-taxable benefit.

The administrative guide for running a cafeteria plan is that at the beginning of every tax period the employees must be alerted to the benefits that are on offer and given a chance to customise their package. This includes information on the specific description of each of the benefits available under the plan, the cafeteria plan's eligibility, rules for participation, the procedures to be followed by the employees in making their election, and the maximum amount of employer contributions available to each employee under the plan.

Advantages that are associated with cafeteria plans are;

  • They cater to the specific needs of different employee groups
  • Generally, businesses and employees will be liable to less tax
  • Plans can be customised to what the employer can afford
  • Workers have a better understanding of their benefits
  • It can make the business more competitive on the job market

Potential disadvantages to cafeteria plans are that;

  • There may be significant administrative procedures to administer customised benefits especially for large organisations
  • Employees are locked in their plans for the tax year
  • Compliance issues can add unwanted complexity to the cafeteria plan

Cafeteria plans can come up in different permutations and combinations as can be deduced from the name. However, according to the Society of Human Resource Management, most cafeteria plans are versions of the following:

  • Full flex plans, in which employers make contributions for all plan-eligible employees, and employees use those contributions to buy various benefits. Employees can then make pre-tax contributions toward any benefit that the employer contributions do not fully cover.
  • Premium-only plans (POPs), which allow employees to choose between receiving their full salary in cash or using a share of that salary to pay group insurance policy premiums on a pretax basis.
  • Simple cafeteria plans, which generally provide employers with 100 or fewer employees a safe harbour from certain plan nondiscrimination requirements in exchange for contributing to each eligible employee's benefits.
  • Flexible spending arrangements (FSAs), which allow employees to make contributions toward health care and dependent care expenses on a pretax basis.

Benefits have become a must for the modern-day employee. This does not mean that businesses have to go bankrupt in trying to remain competitive in this area.  Cafeteria plans have been gaining traction since their introduction in the early 1980s and have become a popular method for employers to provide health and other benefits in a way that results in employee choice as well as tax savings for both the company and its workers.


Takudzwa Vanessa Machingauta is a Consultant at Industrial Psychology Consultants, (Pvt) – a Business Management and HR Consulting Firm.





Takudzwa Vannessa Machingauta
This article was written by Takudzwa Vannessa a Guest at Industrial Psychology Consultants (Pvt) Ltd

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