What Is A Cafeteria Plan?

Generally speaking, Cafeteria Plans allow employees to pay their share of insurance premiums, certain out-of-pocket medical and dependent care expenses, and certain other benefits with pre-tax dollars versus paying these same expenses with after-tax dollars. Thus, the employee saves federal income taxes and FICA taxes on the total amount paid through a Cafeteria Plan. And, in all states except New Jersey, the employee also saves state income taxes on that amount, as well. It is the only method whereby employees can pay their share of benefit costs on a pre-tax basis. Managing these elections is a key responsibility for an HR Generalist to ensure human resources compliance.

Example: A family in the 30% tax bracket that pays $1,500 a year for child care and that qualifies for a dependent care account would save $1,500 (30% of their $5,000 annual payment) by paying its qualified dependent care expenses with a Cafeteria Plan arrangement. If these expenses relate to medical needs, they must be handled according to HIPAA privacy standards.