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advantages and disadvantages of a cafeteria plan

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Explain the advantages and disadvantages of a cafeteria plan?Please explain and provide a reference.

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Solution Summary

What are the advantages and disadvantages of a cafeteria plan?

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Benefits:
A cafeteria plan allows an employee to choose where his or her benefit dollars will be spent. The plan can provide a number of selections, including medical, accident, disability, vision, dental and group term life insurance. It can reimburse actual medical expenses. It can pay children's day care expenses. And, it does these things with pre-tax dollars. One thing to remember is that these benefits must be funded with tomorrow's earnings, not yesterday's. By that I mean, each person must estimate the costs that he or she will incur during the plan's upcoming year and request to have the estimated amount redirected from wages into the plan.

Disadvantages:
Disadvantages for employers: Cafeteria plans share certain administrative hassles with retirement plans. For example, the plan must be in writing. Elections to participate must also be written. A cafeteria plan must not discriminate in favor of the highly compensated employees and must be tested for discrimination annually. Any benefits received by the highly compensated group from a discriminatory plan become taxable to them. The plan must also file a tax return, Form 5500. Although the tax return is purely informational and results in no tax liability, there are ...

Solution provided by:
Sheetal Jain, PGDM
Education
  • BComm, University of Delhi
  • Post Graduate Diploma in Management (Equivalent to MBA), All India Management Association
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