What is a cafeteria plan for health insurance?
“To sum it up…”
- Cafeteria plans let you pick and choose what health benefits you want in your insurance
- Cafeteria plans are offered by your employer
- You can choose to set up a flexible spending arrangement as one of your cafeteria plan benefits
There are many types of health insurance plans available. Some plans offer a great deal of coverage but at the cost of very high deductibles and monthly premiums. Others have lower deductibles and monthly premiums yet they have a limited amount of coverage compared to similar and more expensive plans.
Individual health plans are ones that the individual purchases and these plans are easy to modify, as you can tailor such a plan to your needs.
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Group health plans, on the other hand, are not easily changeable as they are made uniformly for a large group of people who need insurance.
Who offers cafeteria plans?
Cafeteria plans are typically offered by employers to their employees. It is part of the benefits of working for a company that maintains such a plan. Individuals are unlikely to construct cafeteria plans on their own, as the large variety of choices is more suitable to a group of people with different preferences and health concerns.
Employers provide the cafeteria plans so that their employees do not have to commit to a traditional group health insurance plan. Such plans are hard to change and this is one of the main reasons why some companies prefer cafeteria plans.
What is a cafeteria plan?
A cafeteria plan is a health insurance plan that lets employees make their choice from various categories of health benefits. This is why it is called a cafeteria plan. You can choose different ‘items’ for your health insurance like you do with food options in a cafeteria.
The employee can decide what they want to insure while considering what they are able to afford with the money they can use for their health insurance. This varies from employee to employee and depends on which benefits they pick.
Benefits of a Cafeteria Plan
There are several benefits to choosing a cafeteria plan compared to a more traditional health insurance plan. When you compare a cafeteria plan to a standard individual health insurance plan, the main difference is that you do not have your benefits chosen for you. You can determine which benefits are the most useful for your situation.
When compared to a group health insurance plan, the primary distinction is that a cafeteria plan does not involve the employer as a policyholder. The employee is the only policyholder in a cafeteria plan.
Health Insurance as an Option for Cafeteria Plans
As stated previously, cafeteria plans allow for a variety of options. An employee can choose whichever options they wish and move forward with their health insurance plan if they are satisfied with their choices. One of those choices is health insurance.
The health insurance option of a cafeteria plan is one of many benefits available. It is different from other health insurance policies in that it is fully able to be customized. This customization is one of the hallmarks of cafeteria plans in general.
Group Life Insurance in a Cafeteria Plan
Group life insurance is another option available in a cafeteria plan offered by an employer to their employees. Like standard group insurance plans, these plans are uniform for all employees and there is not much room for change in this option.
One benefit to choosing this option, though, is that the cost is lower. With group life insurance, the company and the employees share in the cost of the premiums. Thus, the group life insurance is cheaper than standard life insurance.
Cash and Benefits
A few cafeteria plans allow the choice between benefits and cash. The benefits have already been described before and mostly consists of different insurance options. You can choose whichever you like if you decide to go with the benefits side of things.
However, the cash option is still available in some cafeteria plans. First, you will have to choose to opt out of obtaining health insurance. Then your employer will compensate you with an amount of money that is equivalent to the cost of the insurance plan. This is what is meant by choosing the cash option.
Benefits and Taxes
A great advantage to the benefits of a cafeteria plan are that they are not included in gross income. The insurance plan must meet certain requirements for this to be the case, however. Quite a few insurance plans these days are considered a salary redirection agreement, so they are a payroll deduction prior to any taxes.
Since those types of plans are before taxes, some employees might find themselves saving money on taxes due to the fact that money spent on cafeteria plans is not taxed.
Altering Cafeteria Plans
Cafeteria plans integrate open enrollment terms into their structure. During these periods, eligible employees decide which benefits they want from the plan for the next year or so. Typically, this period takes place at the end of the year.
These benefits remain in place for the next 12 months. While employees are deciding which benefits they want for the upcoming year, it is critical that they evaluate their choices carefully and weigh their options thoroughly.
Once the benefits are chosen for the upcoming year, it is difficult to change them unless what is known as a qualifying event happens.
Qualifying events are typically rare and serious events that do not take place often in an employee’s life. Death, marriage, divorce, childbirth, and adoption are some examples of those events labeled as qualifying events. Once the benefits have begun for the year, such events are the only way to change them.
In the event that a qualifying event happens, you must inform your employer within thirty to 60 days in order to make changes to your coverage. Otherwise, the coverage will remain as you originally chose it.
Flexible Spending Arrangements
Flexible spending arrangements are one of the benefits an employee may choose for their cafeteria plan. Flexible spending arrangements, also known as FSAs, are funded through salary reduction and compensates employees for specific qualifying benefits.
Reimbursement of medical care, assistance with adoption, and assistance with dependent care are all benefits that a flexible spending arrangement might repay an employee for if those benefits qualify.
There is an annual maximum for these benefits and these benefits can only be used during the year that they are provided.
Who receives benefits from a cafeteria plan?
The benefits provided by a cafeteria plan are primarily available to those employees who choose to participate in the plan. However, as mentioned before, their dependents are also allowed to receive the benefits of the cafeteria plan. Spouses of the eligible employees participating in a cafeteria plan are permitted to access the cafeteria plan’s benefits as well.
Sometimes, the cafeteria plan allows for coverage of former employees in addition to current employees and other parties described above. However, the cafeteria plan cannot be made primarily to benefit former employees.
Benefits of an FSA
Several benefits exist from using a flexible spending arrangement. The first advantage involves capitalizing on the tax savings. Using a flexible spending arrangement lowers the amount of your gross income which in turn reduces your taxes. You also have greater freedom in how to use or invest your money.
Its second advantage is a cash flow benefit used as a part of the medical flexible spending arrangement. This benefit means you can be repaid the full amount of your annual election regardless of current contributions to the medical FSA.
The Bottom Line
The idea of a cafeteria plan is fairly straightforward. You choose which benefits you want to include in your health insurance plan and leave out those you do not want in your health insurance plan. However, there are some major differences between it and other health insurance plans offered by employers.
Group health insurance plans, typically offered by employers, remain the same for all the employees. This is the opposite of a cafeteria plan, which can vary from employee to employee. These plans are more flexible and have several benefits to using them.
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