Definition
A cafeteria plan is a type of employee benefit plan offered in the United States pursuant to Section 125 of the Internal Revenue Code. Its name comes from the earliest such plans that allowed employees to choose between different types of benefits, similar to the ability of a customer to choose among available items in a cafeteria. Qualified cafeteria plans are excluded from gross income. To qualify, a cafeteria plan must allow employees to choose from two or more benefits consisting of cash or qualified benefit plans. The Internal Revenue Code explicitly excludes deferred compensation plans from qualifying as a cafeteria plan subject to a gross income exemption. Section 125 also provides two exceptions.
Cafeteria Plan
What is a ‘Cafeteria Plan’
A Cafeteria plan is an employee benefit plan that allows staff to choose from a variety of benefits to formulate a plan that best suits their needs. Cafeteria plan options may include health and accident insurance, cash benefits, tax advantages and/or retirement plan contributions.
Explaining ‘Cafeteria Plan’
Similar to a cafeteria where individuals select their food of choice, employees may choose benefits of their choice. These plans become more useful as diversity within workforces continues to grow. For example, the benefit needs of young families may differ greatly from those of a single person.
Further Reading
- E. Banks, The Palgrave Macmillan Dictionary of Finance, Investment and Banking© Erik Banks 2010 – link.springer.com [PDF]
- Corporate Financial Assistance for Child Care. The Conference Board Research Bulletin No. 177. – eric.ed.gov [PDF]
- The role of benefits in employee motivation and retention in the financial sector of the Czech Republic – www.tandfonline.com [PDF]
- Financial innovation for an aging world – www.nber.org [PDF]
- Theories of the Financial Planning Profession. – search.ebscohost.com [PDF]
- Cafeteria Plan Compliance: The Choices for Employees Can Be Many, but the Recipes for Employers Are Exact – www.questia.com [PDF]
- Employee benefits in small medium enterprises (SMES): practice and challenges – papers.ssrn.com [PDF]
