Health Savings Accounts: Do You Know What a Cafeteria Plan Is?

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Understanding the complexities and nuances of insurance policies is rarely a simple task. This can be especially true of employer-provided healthcare plans, which offer many different types of coverage that may or may not benefit you specifically. This is where cafeteria plans tend to shine, because they’re more flexible and customizable to what the recipient needs. 

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Granted, every policy and plan will vary, but there are some similarities worth understanding. Here’s a look at the basics of what a cafeteria plan is, how they work what their advantages and disadvantages are, so you can better decide if it’s the kind of plan for you. 

What Is a Cafeteria Plan?

Also known as a 125 plan, after its IRS classification, a cafeteria plan is an employer-sponsored healthcare plan that lets you pick and choose items you want coverage for. As its name suggests, it’s based on the idea of a cafeteria or buffet, where customers can grab individual items to round out their own meal. 

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To qualify as a cafeteria plan, it has to have both one taxable benefit option as well as one qualified pre-tax benefit. A big draw of this type of plan is that many of the options available are exempt from taxation. Though, certain offerings may require Social Security and Medicare taxes. 

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How Does It Work?

Every cafeteria plan will be different depending on type of insurance being offered, but often there will be an abundance of options to pick from. Some of the most common offerings are health savings accounts (HSAs), group term life insurance and disability insurance. Other popular options that may be on the menu include flexible spending accounts, adoption assistance and even cash benefits. 

Employees decide how much money they’d like to invest in their individual cafeteria plan at the beginning of the year. That amount is then divided across annual pay periods and incrementally deducted from your paycheck. Keep in mind that any money not spent by the end of the year is forfeited and won’t roll over. If you spend over the allotted amount, a portion is paid by you while a portion will often be covered by the plan. 

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While their flexibility is their biggest appeal, it can mean they’re complicated and time-consuming to stay on top of. Especially if the terms of the plan offered change from year to year. 

What Types of Cafeteria Plans Are There?

While the appeal of cafeteria plans is that they’re customizable, there are a few basic types of them to keep in mind. Full flex plans are when employers make contributions for all employees that are eligible. Premium-only plans let employees decide to take a portion of their income and pay it toward benefits. Simple cafeteria plans are designed for companies with less than 100 employees, and flexible spending arrangements (FSAs) allow for pre-tax contributions to healthcare and benefits. 

Similar to FSAs, health savings accounts (HSAs) are a common feature of cafeteria plans. However, HSA ownership stays with the recipient, allowing the recipient to spend the money on a number of healthcare-related items. A big advantage here is they will stay with you even if you lose or change jobs. There are also dependent care assistance plans, which allow employees to set aside up to $5,000 annually for specific services like child care. 

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What Are the Advantages and Disadvantages?

Obviously, the big advantage to cafeteria plans is the flexibility, giving everyone who opts in a chance to pick the plan that’s right for them. They can also help bring down an employee’s tax liability since the money invested doesn’t count toward any taxed income. 

As far as employers, offering a cafeteria plan can bring down their payroll taxes, which can reduce or eliminate the cost of offering the plan. Additionally, offering flexible benefits makes the workplace more appealing and can help reduce worker turnover. 

The disadvantages are the time that’s spent administering, which includes both the recipient and the employer that’s offering them. Other disadvantages can include certain taxable offerings, which can result in liabilities under certain circumstances. 

Is a Cafeteria Plan Right for You?

Ultimately, you’re the best person to decide what type of cafeteria plan will work best for your situation. Though if you’re unsure about anything or have some questions, talk to someone at your job who’s there to help make sense of any plan’s specifics. You can also talk to the insurance provider directly, or even chat with a financial advisor who can help customize the ideal insurance plan that will benefit you and your family the most. 

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