Cafeteria Plans

Question 1

Cafeteria Plans

Employee Advantages

Answer 1

• Select benefits most appropriate to their personal needs
• Direct savings because benefit expenses are paid on tax-favored basis
• Not subject to federal income, FICA, FUTA tax

Question 2

Cafeteria Plans

Employer Advantages

Answer 2

• No FICA/FUTA tax on amounts contributed to cafeteria plan
• Expenses tied to payroll expenses will be reduced
• Help EEs gain awareness of value of benefits
• May lead to wise EE decisions and therefore greater appreciation of benefits and EE satisfaction

Question 3

Cafeteria Plans

Employer Disadvantages

Answer 3

• Ongoing cost of admin and operation
• Full amount of benefit must be available during entire year regardless of how much EE has actually contributed
• Adverse selection of benefits
• Subject to complex coverage and nondiscrimination testing

Question 4

Cafeteria Plans

Employee Disadvantages

Answer 4

• Benefit elections must be made prior to beginning of year and are irrevocable
• Use it or lose it rule
• May be unfavorable to pay for dependent care through cafeteria plan
• Because FICA tax is not paid, EE’s SS benefits may be reduced slightly

Question 5

Cafeteria Plans

Types of Cafeteria Plans (List, Define)

Answer 5

• Premium Conversion = no ER contributions and allow EEs to pay insurance on tax-favored basis
• Flexible Spending Account = EE has choice between cash and covered benefit
• Full Flex Plan = Cash/Credit system used to fund cost of selected benefits

Question 6

Cafeteria Plans

Written Plan Requirements

Answer 6

• Benefit Descriptions
• Eligibility and Participation rules
• Election procedures
• Contribution manner
• Max ER contributions available
• Plan year
• Nondiscrimination testing rules

Question 7

Cafeteria Plans

Qualified Benefits

Answer 7

Qualified = not taxed

• Accident/Health Coverage
• ER-provided group term life ins. (under $50k)
• ER-provided dependent care assistance
• 401k
• HSA contributions

Question 8

Cafeteria Plans

Taxable Benefits

Answer 8

• Cash
• PTO
• Group term life > $50k

Question 9

Cafeteria Plans

Non-Permitted Benefits

Answer 9

• Educational assistance
• Medical savings account
• LTC

Question 10

Cafeteria Plans

Negative and Evergreen Elections

Answer 10

• Negative = automatically enroll in certain benefits unless opt out
• Evergreen = automatically continuing same prior benefits unless opt out

Question 11

Cafeteria Plans

Changes in Coverage

Answer 11

Change in:

• Martial status
• Number of dependents
• You/Spouse’s Employment status
• Residence