You may already offer your employees a health plan, which is a smart recruitment and retention strategy. About 66% of Americans say they would not accept a job that doesn’t offer health coverage.* If you want to add even more value to your benefits offerings, a cafeteria plan may be the answer.
Cafeteria plans are paired with your existing health plans to allow employees to pay for qualified benefits through contributions made on a pre-tax basis. Employees can reduce their taxable income by using these flexible benefits plans to pay for out-of-pocket health care, vision, dental, child care and other qualified expenses.
You may also hear these referred to as section 125 plans because they’re governed by section 125 of the Internal Revenue Code.
A POP allows employees to pay for health care coverage through salary reductions. A portion of the employee’s salary is deducted pre-tax to cover their portion of the employer-sponsored benefit cost.
An FSA allows employees to set aside a portion of their paycheck pre-tax in an employer account to pay or be reimbursed for certain eligible, out-of-pocket medical, vision and dental expenses. For most plans, any unused dollars remaining at the plan year’s end revert to the employer and are non-reimbursable.
An LPFSA is an option for employees with a Health Savings Account (HSA), which is designed specifically for individuals participating in an HSA-qualified High Deductible Health Plan (HDHP). Adding an LPFSA allows employees to pay for qualified vision and dental expenses on a pre-tax basis. Sometimes, it can also be used to pay for qualified medical expenses after the plan deductible is met.
While the IRS does not allow an employee to have an HSA and traditional FSA at the same time, a limited purpose FSA is available to employees if their employer offers it.
A DCAP helps employees pay for child care and adult day care services with pre-tax contributions. The funds can be used to cover eligible expenses for services such as preschool, nanny services, day care or care for an adult who is disabled.
While section 125 plans offer valuable flexibility and savings, it’s also important to be aware of their responsibilities and costs.
| Pros | Cons |
|---|---|
| Pre-tax contributions lower the employee’s total taxable income. | Cafeteria plans are use-it-or-lose-it, meaning employees may forfeit contributions not used by the end of the year. |
| Employees have control over how much they want to contribute in pre-tax dollars. | Administration can be complex. |
| Employees have plan options to meet their individual needs (e.g., a young parent may value child care savings, while an older employee with a chronic health condition may value tax savings on qualified medical expenses). | Employers may need to pay setup fees to get started. |
An employer must have a written section 125 plan document to offer cafeteria plans. Some organizations find it easier to hire a third-party benefits administrator to handle administration, process employee reimbursements and stay current on regulations.
At GuideStone®, we come alongside ministries like yours to help you understand your employees’ health plans and benefit offerings, whether exploring cafeteria plans, understanding the risks of self-funding or minimizing employer-sponsored health care costs. For more information, contact us at Insurance@GuideStone.org or 1-844-INS-GUIDE (1-844-467-4843), Monday through Friday, from 7 a.m. to 6 p.m. CT.
GuideStone welcomes the opportunity to share this general information. However, this article is not intended to be relied upon as legal, tax or medical advice.
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