Careers Succeeding at Work Cafeteria-Style Benefit Plans Employees May Select Among a Variety of Nontaxable Options Share PINTEREST Email Print Thomas Barwick / Getty Images Succeeding at Work Human Resources Glossary Job Search Resources Hiring Best Practices Employment Law Employee Motivation Employee Management Management Careers Management & Leadership Employee Benefits By Susan M. Heathfield Susan M. Heathfield Susan Heathfield is an HR and management consultant with an MS degree. She has decades of experience writing about human resources. Learn about our Editorial Process Updated on 12/07/19 Are you looking for a way to customize your benefits plan to meet the needs of your individual employees? A cafeteria-style benefits plan may be the best way to go. This custom-selection option is an employee benefits plan that allows your employees to choose among a variety of offerings to create a benefits package that best meets their needs and those of their family. Cafeteria-style plans provide a special exception to federal income tax rules that apply to an employee's earnings. In a cafeteria-style plan, employees are allowed to select among various nontaxable benefits and cash. Benefits to Employees In a cafeteria-style plan, an employee generally receives a certain number of dollars from the employer to purchase particular elements of a benefits plan. This enables employees to purchase benefits, such as health insurance, with pretax dollars. Cafeteria-style plan options can include various levels of health insurance plans and other insurance options such as short term and long term disability insurance or group term life insurance. Other options may include 401(k) plan contributions for retirement, dependent care assistance, adoption assistance plans, and contributions to Health Savings Accounts (HSAs). Not All Employees Want the Same Benefits This type of customized menu provides employees with more take-home pay and several additional benefits. The advantage of a cafeteria plan is that employees can choose what most makes sense for them. For example, a young employee with no health problems might opt to spend his or her cafeteria plan dollars on a minimal health plan. An employee with four family members might choose to spend their cafeteria dollars on a comprehensive health plan with a lot of coverage. The employee without a family, on the other hand, might choose to spend his or her benefit dollars investing in a retirement plan. Regulation of Cafeteria-Style Plans Cafeteria plans are governed by Section 125 of the Internal Revenue Code. No matter what the goal of the employer’s cafeteria plan, the plans are named after Title 26, Section 125 of the United States Code where 'cafeteria plans' are specifically excluded from the calculation of gross income for federal income tax purposes. Section 125 plans allow employees to contribute pretax dollars into the plan. Contributions toward plans are not subject to federal, state, or social security taxes. The contributions are placed into an account the employee can use to pay for allowed expenses (e.g., premiums for health insurance, dependent care costs, medical supplies). Since no federal, state, or social security taxes are taken out and the dollars are not included as gross income, the employee saves anywhere from 27 percent to 50 percent on these purchases. When the Employee's Choices Exceed the Amount of Money In a typical cafeteria plan, an employee might choose options that exceed the number of dollars allowed by the employer. In these cases, the employee pays a part of the premium for his or her chosen benefits, so the cost to employers is lower. For example, an employee with health problems or an employee who is age 55 and order, might choose to "buy up" to a more comprehensive health plan that includes the services they need. Working with Benefits Professionals In all cases, working to provide employees with a cafeteria-style benefits plan deserves the assistance of a knowledgeable benefits plan professional who can advise the employer about the various options. Given the complexity of the U.S. tax code and the unpredictable changes in laws, employers should always seek the assistance of a professional. You want to make sure your plan is legal and that it benefits both employee and employer. Do Your Homework The web abounds with sites offering help and advice about customized benefits plans but employment laws and regulations vary by state and country, so no website has the definitive answer. When in doubt, always seek legal counsel or assistance from the state, federal, or international government resources to make certain your legal interpretation and decisions are correct. The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.