May 26, 2009

ISSUES IN PLAN DESIGN | Cafeteria Plans

Before committing itself to the establishment of a cafeteria program, an employer must be sure a valid reason exists for converting the company's traditional benefit program to a cafeteria approach. For example, if there is strong employee dissatisfaction with the current benefit program, the solution may lie in clearly identifying the sources of dissatisfaction and making appropriate adjustments in the existing benefit program, rather than in shifting to a cafeteria plan. However, if employee dissatisfaction arises from widely differing benefit needs, conversion to a cafeteria plan may be quite appropriate. Beyond having a clearly defined purpose for converting from a traditional benefit program to a cafeteria program and being willing to bear the additional administrative costs associated with a cafeteria approach, the employer must face a number of considerations in designing the plan.

The Type and Amount of Benefits To Include

Probably the most fundamental decision that must be made in designing a cafeteria plan involves determining what benefits should be included. An employer who wants the plan to be viewed as meeting the differing needs of employees must receive employee input concerning the types of benefits perceived as most desirable. An open dialogue with employees will undoubtedly lead to suggestions that every possible employee benefit be made available. The enthusiasm of many employees for a cafeteria plan will then be dampened when the employer rejects some—and possibly many—of these suggestions for cost, administrative, or psychological reasons. Consequently, it is important that certain ground rules be established regarding the benefits that are acceptable to the employer.

The employer must decide whether the plan should be limited to the types of benefits provided through traditional group insurance arrangements or be expanded to include other benefits. At a minimum, it is important to ensure that an overall employee benefit program provide employees with protection against all major areas of personal risk. This suggests a benefit program with at least some provision for life insurance, disability income protection, medical expense protection, and retirement benefits, but it is not necessary that all these benefits be included in a cafeteria plan. For example, most employers have a retirement plan that is separate from their cafeteria plan because of Section 125 requirements. Other employers make a 401(k) plan one of the available cafeteria options.

In some respects, a cafeteria plan may be an ideal vehicle for providing less traditional types of benefits. Two examples are extra vacation time and child care. Some plans allow an employee to use flexible credits to purchase additional days of vacation. When available, this option has proven a popular benefit, particularly among single employees. A problem may arise, however, if the work of vacationing employees must be assumed by nonvacationing employees, in addition to their own regularly assigned work. Those not electing extra vacation time may resent doing the work of someone else who is away longer than the normal vacation period.

In recent years, employers have been under increasing pressure to provide care for employees' children, which represents an additional cost if added to a traditional benefit program. Employees who include child-care benefits in a cafeteria plan can pay for the cost of such benefits, possibly with dollars from an FSA. However, lower-paid employees may be better off financially by paying for child care with out-of-pocket dollars and electing the income tax credit available for dependent-care expenses.

One question that sometimes arises is whether dependent life insurance should be included in a cafeteria plan. As mentioned previously, amounts of $2,000 or less do not fit the definition of a qualified benefit and cannot be included. If the amount of coverage available exceeds $2,000, the benefit can be provided as long as it is treated as a cash benefit. An employee who elects coverage with employer-provided dollars will have taxable income as determined by Uniform Premium Table I. Because this amount will exceed the actual cost of the coverage in some cases, dependent life insurance is often made available outside a cafeteria plan. When it is included in a cafeteria plan, there is frequently a requirement that it be purchased with after-tax salary reductions.

Cost is an important consideration in a cafeteria plan. The greater the number of benefits, particularly optional benefits, the greater the administrative costs. A wide array of options may also be confusing to many employees and require extra personnel to counsel employees or to answer their questions.

Level of Employer Contributions

An employer has considerable latitude in determining the amount of dollars that will be available to employees to purchase benefits under a cafeteria plan. These dollars may be a function of one or more of the following factors: salary, age, family status, and length of service.

A major difficulty arises in situations in which the installation of a cafeteria plan is not accompanied by an overall increase in the amount of the employer's contributions to the employee benefit plan. It is generally felt that each employee should be provided with enough dollars so that he or she can purchase optional benefits that, together with basic benefits, are at least equivalent to the benefits provided by the old plan.

Including a Premium-Conversion or FSA Option

A premium-conversion or FSA option under a cafeteria plan enables employees to lower their taxes and, therefore, increase their spendable income. Ignoring any administrative costs, there is probably no reason not to offer this option to employees for benefits such as dependent care or for health insurance premiums. However, salary reductions for unreimbursed medical expenses pose a dilemma. While such deductions save taxes for an employee, they may also result in his or her obtaining nearly 100 percent reimbursement for medical expenses, which may negate many of the cost-containment features in the employer's medical expense plan.

Change of Benefits

Because employees' needs change over time, a provision regarding their ability to change their benefit options must be incorporated in a cafeteria plan. As a rule, changes are allowed prior to the beginning of the plan year. Additional changes may be allowed as long as they are permissible under Section 125 regulations.

Two situations often affect the frequency with which benefits may be changed. First, charges to employees for optional benefits must be adjusted periodically to reflect experience under the plan. If charges for benefits rise between dates on which employees may change benefit selections, the employer must either absorb these charges or pass them on to the employees, probably through increased payroll deductions. Consequently, most cafeteria plans allow benefit changes on annual dates that are the same as the dates when charges for benefits are recalculated as well as the dates on which any insurance contracts providing benefits under the plan are renewed.

The second situation arises when the amount of the employer's contribution is based on compensation. If an employee receives a pay increase between selection periods, should he or she be granted more dollars to purchase additional benefits at that time? Under most cafeteria plans, the dollars available to all employees are calculated only once a year, usually before the date by which any annual benefit changes must be made. Any changes in the employee's status during the year will have no effect on the employer's contribution until the date on which a recalculation is made in the following year.

1 comments:

Jaz said...

An insurance disability lawyer can come to the rescue in such times to guide and counsel the individual through the process. A lawyer will make sure the proper documentation and specific i

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