If an employer requires employees to contribute to the cost of coverage under an employee benefit plan, such as a medical plan, adopting a cafeteria plan will allow the employee to pay his or her contribution through a pre-tax salary reduction agreement. Cafeteria plans are popular with employees because of this tax advantage and because they allow an employee to “opt in” to coverage for particular benefits in accordance with his or her needs.
A cafeteria plan is a device that allows employees to choose to pay for certain benefit coverage on a pre-tax basis. The simplest cafeteria plan is one that offers participants a choice between an amount of cash and a tax-favored employee benefit, such as coverage under a group health plan. More generally, a cafeteria plan offers participants a choice between one or more non-taxable benefits and one or more taxable benefits, with cash as the most common taxable benefit. The cash alternative may result from contributions by an employer. However, in the more typical case, the cash option is represented by the employee’s decision not to make voluntary salary-reduction contributions. The non-taxable benefit choices may range from...
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