Lecture 18 Cafeteria Plans

1. Lecture 18Cafeteria Plans • Reasons for Cafeteria Plans • Taxation • Nature of Cafeteria Plans • Types of Plans • Obstacles • Issues in Plan Design

2. Reasons for Cafeteria Plans • Greater appreciation of benefits by employees • Meet employee needs better • Cost control

3. Taxation • Section 125 of the Internal Revenue Code applies • If properly structured, then the employee is not taxed on benefits provided through a cafeteria plan except to the extent that the benefits would normally be taxed (life insurance in excess of $50,000)

4. Nature of Cafeteria Plans • Permissible benefits • Medical expenses • Disability • Death and dismemberment • Vacations • Legal expense plans • Dependent care assistance • Group term life • Choice of medical expense plans does not constitute a cafeteria plan unless cash is a choice

5. Nature of Cafeteria Plans - (cont.) • Benefit election • Prior to the beginning of the year • Changes only for allowed circumstances • Change in family status • Change in job status • Payroll deductions and salary reductions • Premium-conversion plans • Flexible spending accounts (FSAs) • Use it or lose it requirement • Amounts not taxed under federal and state taxes, and under Social Security

6. Types of Plans • Core-Plus plans • Modular plans • Choice among several pre-designed plans • Salary-Reduction-Only plans

7. Obstacles to Cafeteria Plans • Unsettled federal income tax rules • Meeting nondiscrimination rules • Concentration test • Less than 25% of benefits for key employees • Eligibility test • Condition for participation rules • Not discriminatory in favor of HCEs • Nondiscriminatory contributions and benefits • Employer’s obligation to prevent unwise employee choices • Negative attitudes • Adverse selection • Cost

8. Issues in Plan Design • Type and amount of benefits to include • Level of employer contributions • Premium-conversion or FSA options • Change of benefits