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The two primary factors that have contributed to the increased popularity of cafeteria plans (often called flexible benefit plans or flex plans) over the years are:


  • (1) The increasing costs of benefits, and
  • (2) A diverse workforce with vastly differing employee benefit needs.


 provided a cafeteria plan is designed in accordance with all applicable tax laws, a cafeteria plan participant can avoid ____ and instead receive ______.

  • taxation
  • tax-free benefits


the plan really is an umbrella plan under which tax-favored employee benefits are offered. It is merely a mechanism to pay for employee benefits.

The cafeteria plan


 provided favorable tax treatment to certain benefits funded through a cafeteria plan. It specifically defined a cafeteria plan to mean a plan under which all participants are employees.

 IRC Section 125


advantage when an employee receives benefits under a cafeteria plan

  •  preferential tax treatment (most notably)


 What are the primary disadvantages to an employee in receiving benefits under the umbrella of a cafeteria plan?

  • benefit elections generally must be made prior to the beginning of the plan year
  • the election is irrevocable during the entire period of coverage
  • “use it or lose it” rule


 the advantages to employers in offering their employee benefits through a cafeteria plan.

  •  financial incentives
    • payroll cost savings
  •  cafeteria plans create greater employee awareness of the overall value of their benefits

  • can also serve as a mechanism to control escalating benefit costs



 What potential disadvantages do employers face in sponsoring a cafeteria plan?

  • ongoing cost of administration and operation of such a plan.

  • Adverse selection becomes a greater risk when employees can opt in and out of various benefit plans.

  • plans are subject to complex coverage and nondiscrimination testing in order to comply with federal tax law


 there are no employer contributions and the plan is offered to employees so they may pay for their insurance costs on a tax-favored basis. Because there are no employer contributions or flexible credits, this type of plan is perceived as a cafeteria plan in its simplest form

 premium conversion plan


 As a general rule, which types of benefits typically provide a premium conversion feature under a flexible benefit plan?

  • medical insurance (including dental, vision and other types of medical coverage)
  • group term life insurance not in excess of $50,000


 One type of cafeteria plan includes FSAs, also called ________

reimbursement accounts


 Most often these are bookkeeping accounts with the actual funds remaining as part of the employer’s general assets. Records are maintained showing the activity in each participant’s individual account.

 reimbursement accounts


  • ______ plans give participants an opportunity to select among a full range of benefits.
  • the employer determines a dollar value it wishes to earmark for the benefits portion of total compensation. This dollar value is in addition to any salary reductions employees choose to direct to reimbursement accounts or additional benefit purchases.
  • Once an employer has computed the dollar value it wishes to contribute to benefits, either the cash is contributed to the plan or a credit system is developed whereby credit amounts are used to fund the similarly credit-priced benefit options.
  • sometimes called ________

  • A full flex plan
  • a full choice plan. 


involves understanding the appropriate pricing parameters of the benefits and developing a pricing matrix. The pricing matrix takes into account several factors. Among these factors are:

  • (a) The number of credits a participant will be given
  • (b) The acceptable level of employee contribution
  • (c) The number of participants expected to select each benefit offered
  • (d) The number of credits that are expected to be paid as a cash benefit
  • (e) The purchase price of benefit options
  • (f) The hidden employer subsidies
  • (g) The total premium cost.

valuation of flex plan credits 


Often times employers develop credit values rather than use the actual dollar values associated with premium costs because

it can smooth out benefit inequities.


minimum level of benefit coverage below which the company will not permit an employee to go.

The idea of a core benefit 


intended to supply a basic level of protection so that employees cannot be underinsured. In protecting the employee from extreme deprivation, the plan sponsor is also protecting its own interests as well

core benefits


The success of a cafeteria plan depends on ________.  Before an employer establishes a cafeteria plan, it may be useful to survey employees. Low levels of this will defeat the purpose of establishing the plan and perhaps cause the plan to fail required ________ testing.

  • participation
  • nondiscrimination


 Higher paid employees typically value opportunities to ___________ through flexible benefit plans. Generally, lower paid employees are not very interested in tax savings; rather, they prefer to __________.

  • reduce personal taxes
  • maximize weekly take-home pay.


Why is it important for an employer to develop a carefully crafted communication campaign when establishing a cafeteria plan?

employees could cafeteria plan as a way for their employer to pay them less


defines a welfare benefit plan as any plan, fund or program which is established or maintained by an employer or employee organization for the purposes of providing participants’ or beneficiaries’ medical, surgical or hospital care or benefits in the event of sickness, accident, disability, death or unemployment. In addition, benefits for vacation, apprenticeship programs or other training programs, daycare centers, scholarship funds or prepaid legal services are considered welfare benefits. Not all welfare benefit plans can be funded through a cafeteria plan.

 ERISA Section 3


In order for a cafeteria plan to be afforded favorable tax treatment, the plan must allow participants to choose between ____ or more benefits consisting of cash (or a taxable benefit that is treated as cash) and qualified benefits. A plan cannot be designed to offer only a choice among qualified benefits, without the   component. Without this component, the plan is not a cafeteria plan. A __________ is sufficient to satisfy the cash requirement. If a participant wanted to elect cash in a salary-reduction-only cafeteria plan, he or she would elect not to reduce his or her salary, thus receiving his or her total compensation in cash.

  • two 
  • cash or cash equivalent
  • salary-reduction agreement


 For a cafeteria plan to be considered qualified with respect to its written form, what provisions must the written plan include (6)?

  • A specific description of each benefit available
  • The rules governing employees’ eligibility and participation
  • The procedures for making participant elections under the plan
  • The manner in which contributions may be made
  • The maximum amount of employer contributions available to any participant.
  • The plan year.


 Cafeteria plans operate as an exception to the tax doctrine of ______


 (Usually, when an individual has control over how money is spent, it becomes taxable to that individual)

constructive  receipt