What is a Cafeteria Plan?

A Cafeteria Plan is a type of employee fringe benefit plan.  Using a Cafeteria Plan, an employer can offer employees various taxable or tax-free benefits including health, life and disability insurance coverage, medical expense reimbursement, dependent care assistance, parking and transportation cost reimbursement, and adoption expense reimbursement.  The employer may contribute part of the cost of these benefits as set forth in the plan.  The employee selects the benefits he or she wishes to receive.  The employer then withholds the employee-portion of the benefit costs from the employee’s paycheck.  Both the employer and the employee save money, because the benefits are paid for with before-tax dollars.  That is, neither the employer nor the employee pay income or payroll tax on the amount of money withheld from the employee’s paycheck.  This can be a significant savings to both the employer and the employee. 

 

Under the Internal Revenue Code, a Cafeteria Plan must be set forth in a written plan document.  The terms of the Cafeteria Plan must also be summarized in a Summary Plan Description distributed to the employees.  If you want to discuss the benefits of setting up a Cafeteria Plan for your employees, please give me a call.   Jsenney@pselaw.com or 937-223-1130.

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AND ONE MORE THING.  President Obama on Wednesday reiterated his call to extend an existing 2% payroll tax reduction through 2012. This move was denounced by liberal Democrats who fear the reduction in revenues will undermine Social Security.   Republicans backed the tax break when it was included in a December deal, but House Budget Committee Chairman Paul Ryan more recently has criticized it as a “sugar high” for the economy.  If you want some thoughts on where this is headed, send me an email or give me a call.  Jsenney@pselaw.com or 937-223-1130.

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