5 Benefits of a Cafeteria Plan

Employees who are covered by a cafeteria plan can choose the type of benefits that they want to enjoy. Under this plan, you are required to to place part of your future wages in a fund. In return, you can choose from a variety of benefits that can go anywhere from disability coverage to payment for your child’s day care services. The name of the program was derived from the fact that the beneficiaries can pick their benefits just like choosing an item from a cafeteria. Here are the main advantages of this type of employee benefit plan.

1. Tax Savings

The portion of an employee’s salary that will be redirected into the plan is not included in the computation of federal taxable income, social security tax and Medicare tax. In fact, most states (except Pennsylvania) also exempt plan contributions from being taxed. Since the contributions are subtracted from pretax salaries, the beneficiaries do not have to pay for taxes on the benefits that they choose from the plan. You can argue that participating in this type of plan will result in a lower take home pay. However, when tax implications are taken into account, a cafeteria plan offers an overall savings, due to the tax exemption.

2. Savings Enjoyed by Employers

Since contributions to this type of plan is not included in the taxable social security or Medicare wages, the taxes of the employer re reduced. Moreover, having this plan in place will require only a small amount of startup and maintenance cost. In fact, many businesses claim that all the costs related to setting up the plan can be recovered within one year.

3. Reimbursement for Medical Expenses

With a cafeteria plan, employees can get reimbursement for certain types of medical expenses. The items are listed under Section 125 of the Internal Revenue Code. Here are a few examples of reimbursable medical expenses.

  • HMO Coverage
  • Ambulance Services
  • Lifetime Medical Care
  • Treatment for Alcoholism or Drug Addiction
  • Dental Fees
  • Denture Fabrication
  • Doctor’s Professional Fees
  • Medical Diagnostic Fees
  • Assistance and Accessories for the Deaf and Blind
  • Eye Examination
  • Laser Eye Treatment or Surgery
  • Prescription Eyeglasses
  • In-Patient Hospital Care
  • Treatment for Enhancing Fertility
  • Medical Costs Relating to Adoption Procedure
  • Home Nurse or Domestic Aid Services
  • Language Training for Dyslexia Sufferers
  • Medically Required Hair Transplants
  • Artificial Limbs

4. Reimbursement for Over-the-Counter Medical Items

Apart from health care and insurance costs, participants in a cafeteria plan can also have certain over-the-counter medical products reimbursed. Here are some examples.

  • Pain Relievers
  • Bandages
  • Adhesives for Minor Skin Cuts
  • Allergy Medication
  • Motion Sickness Medication
  • Sunburn Treatment Products
  • Applications for Joint and Muscle Pains
  • Nasal Strips and Sprays
  • Colds and Sinusitis Medication
  • Lozenges
  • Cold and Hot Packs Used for Injuries
  • Wrist Support for Carpal-Tunnel Syndrome
  • Laxatives
  • Anti-diarrhea Medication
  • Menstruation Products
  • Pregnancy Test Kits
  • Insomnia Treatment Products
  • Thermometers

5. Flexible Spending Accounts

Under the plan, you can also benefit from a flexible spending accounts (FSA) to help pay for dependent care services. Here, an employee may be allowed to set aside up to $5,000 yearly to pay for dependent care costs. The amount to be saved will be taken from pretax dollars. The main expenses covered include long-term care of parents, disabled spouse and children under 13 years of age.