Flexible Benefits Plan (Cafeteria Plan)

Also known as cafeteria plans and IRS 125 plans, flexible benefits plans provide employees with a chance to create an individualize benefits package. In these plans, employers contribute a fixed dollar amount towards the cost of the employee's benefits. In turn, the employee may also have the opportunity to contribute into this account. The money placed in this account is then used by the employee to fund the cost of the benefits they select. Flexible benefits plans allow employers to lower their total program cost, while still being able to offer their employee's a competitive choice of benefits.

Employee contributions into this account are made on a before-tax basis, usually through the company's standard payroll deduction process. The money contributed by employers is tax deductible. While some employers may require the employee to select a core set of benefits, the types of programs from which the employee can choose include medical care insurance, retirement benefits (401(k) and 403(b)contributions), life insurance, dental insurance, vision coverage, vacation days, child / dependent care, as well as reimbursement accounts.

In exchange for providing the employee and employer with tax-free funding, the Internal Revenue Service (IRS) places a number of restrictions on these plans. For example, employees are unable to carry forward any unused benefits dollars, and money cannot be used to fund tuition aid programs. As is the case with retirement benefit such as the 401(k), employers must also ensure no more than 25% of the tax-favored benefit flows to highly compensated employees.

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