Should You Offer Employees a Cafeteria Plan?

Posted by: Trish Barnes on January 14, 2016 — GET FREE UPDATES OF NEW POSTS HERE

Offering benefits to employees can be an effective recruitment tool and have numerous other advantages for employers. While most benefits target specific areas such as medical or retirement, cafeteria plans are much more flexible and give employees greater control over the types of benefits they receive. As a result, a cafeteria plan can be very appealing to workers, which begs the question: Should you offer your employees a cafeteria plan?

 

What is a Cafeteria Plan?

A cafeteria plan is “A reimbursement plan governed by IRS Section 125 which allows employees to contribute a certain amount of their gross income to a designated account or accounts before taxes are calculated.” They are also known as Section 125 Plans or flexible spending accounts (FSAs). Simply put, employees can place part of their pre-tax income into a variety of funds to meet their specific needs. For example, they could funnel a portion of their money into healthcare, childcare, dental, life insurance, etc.

 

Benefits of Cafeteria Plans

Perhaps the most obvious benefit is that this can really work to your advantage in terms of recruiting, and it can help your company attract some of the top talent in your industry. If a highly sought-after job candidate is considering which company to join, they’ll often side with the one who offers the best benefits. This means you can increase your company’s desirability considerably by offering cafeteria plans.

The same could be said when it comes to retaining employees — and it’s reasonable to expect a lower turnover rate when your employees are able to choose from a comprehensive list of benefits that meet their unique needs.

Another plus is that it can minimize your tax and payroll liabilities — and according to Entrepreneur, “Because the pre-tax benefits aren’t subject to federal social security withholding taxes, employers win by not having to pay FICA or workers’ comp premiums on those dollars.” In turn, this can slightly increase your overall profit margins.

 

Drawbacks

There are two main drawbacks when it comes to cafeteria plans. One is that there is an initial set up fee involved. However, it’s important to note that this fee should be offset when you consider your savings in the long run.

The other downside is that you’re going to have to deal with extra paperwork — and it can be a little tricky figuring out all of the details and subtle nuances involved with the process. If you’re already stressed out dealing with piles of documents, the whole process can be an added headache. Fortunately, you can streamline things and have the bulk of the paperwork done for you by outsourcing employee benefits management to a third party.

When you break it all down, offering your employees a cafeteria plan tends to have more pros than cons and makes sense if you’re looking to gain a competitive advantage when it comes to recruiting and employee retention. However, if your employees already feel that their current benefits are sufficient and acquisition/retention isn’t an issue, this may be overkill.