THE RATIONALE FOR CAFETERIA PLANS

The growth in employee benefits has caused two problems. First, some employers feel that many employees do not recognize and appreciate the magnitude of their employee benefits; indeed, as benefits increase, employee appreciation often seems to decrease. Advocates of cafeteria plans argue that by giving employees a stated dollar amount with which they must select their own benefits (from a list of options), employees become more aware of the actual cost of these benefits and are more likely to appreciate the benefits they choose.

A second problem is that the inflexible benefit structure of conventional employee benefit plans does not adequately meet the various benefit needs of all employees, often leading to employee dissatisfaction. For example, single employees often resent the medical coverage that married employees receive for their families because the single employees receive no benefit of corresponding value. Similarly, employees who have no dependents often see little value in life insurance and would prefer other benefits. Those who favor the concept of cafeteria plans feel that such dissatisfaction can be minimized if employees have the option to select their own benefits. Advocates of cafeteria plans argue that this increased employee satisfaction will result in a better employee-retention record and in greater ability to attract new employees.

Some employers see the cafeteria approach to benefit planning as an opportunity to control the escalating benefit costs associated with inflation and with the new requirements of recently enacted federal and state legislation. Because a cafeteria plan is essentially a defined-contribution plan rather than a defined-benefit plan, it provides a number of opportunities for controlling increases in costs. For example, it may encourage employees to choose medical expense options that have larger deductibles or a greater degree of managed care so that they can more efficiently use the fixed number of dollars allotted to them under the plan. A cafeteria plan may also enable the employer to pass on to the employees any increased benefit costs that result from having to comply with legislation that mandates additional benefits. In addition, because increases in employer contributions are not directly related to increases in benefit costs, the employer can grant percentage increases in the amounts available for benefits that are less than the actual overall increase in employee benefit costs.

It should be noted that early cafeteria plans were designed primarily to meet the varying needs of employees. In contrast, newer plans are much more likely to be instituted as a cost-saving technique.