Taking Another Look at Cafeteria Plans

Cafeteria plans are getting new attention during the pandemic as a way to let employees select—and fund with pretax dollars—optional insurance benefits and spending accounts that meet their health and caregiving needs.

Also called Section 125 plans (after the relevant section of the tax code), cafeteria plans are used to direct employee contributions to group health plans and 401(k) retirement plans. During the COVID-19 pandemic, however, they've received renewed attention as a way to let employees use pretax dollars to fund supplemental health care, such as critical illness insurance. They also channel salary-deferred contributions to health savings accounts (HSAs), health flexible spending accounts (FSAs) and dependent care FSAs (DC-FSAs), sometimes referred to as dependent care assistance programs, as well as life and disability insurance and even mass-transit debit cards.

"Cafeteria plans are a necessity if your employees are making salary-reduction elections so that a portion of their salary, pretax, is directed toward [health or other insurance] premiums" and tax-advantaged spending accounts, said Heather DeBlanc, a partner in the Los Angeles office of Liebert Cassidy Whitmore. "In order for an employee to divert salary to pretax premiums, a cafeteria plan document must be in place and approved by the governing body of the employer," she explained.

[SHRM members-only toolkit: Understanding Section 125 Cafeteria Plans]

The Big Picture

Employers shouldn't just take for granted that their employees understand the potential benefits of or how their cafeteria plans work, benefits advisors say. Simply offering benefits through a cafeteria plan is never enough to assure appropriate use. Communication and education are must-do's during open enrollment or when onboarding new hires.

"I am a big believer in total rewards," said Jennifer Barton, who heads World Insurance Associates' employee benefits division. Barton recommends that employers do a total rewards gap assessment. "I think now more than ever, that's important for an organization to assess," she said. Employees' benefits-related needs have shifted and changed during the pandemic—employees' priorities are likely to remain different than they were in the past, especially for those continuing to work remotely, she said.

For instance, while commuter benefits may have been popular before the pandemic, they are likely less so now in some cases, Barton said. Meanwhile, the varying needs of employees working from home, including those related to the care of children and others, is likely to spur interest in caregiving benefits such as DC-FSAs.

"I think the most important thing an HR person could do today is to take stock of what they have for their employees, and then go out and talk to employees" about the benefits they value, those they don't see much value in and those they don't have access to but would like to receive, Barton said.

Whether employee input is gathered through surveys, focus groups or some other means, it's important, she added, "to understand what's critical today given the changing dynamics that employees are facing both at home and in the workplace."

[Related SHRM article: Soliciting Employee Feedback for 2022 Benefits Changes]

SHRM Research Shows ... HSAs have been the fastest-growing type of health account but medical FSAs remained the most popular last year, offered by 68 percent of respondents while HSAs were offered by 59 percent, according to the Society for Human Resource Management's 2020 Employee Benefits survey. Responses from 2,504 HR professionals were collected from Sept. 28 through Nov. 10, 2020. Organizations also expanded supplemental health benefits in almost every category last year as the pandemic caused higher-than-usual rates of illness and hospitalizations. (Long-term care insurance premiums, unlike premiums for supplemental health insurance, generally cannot be paid on a pretax basis.)

Lin Grensing-Pophal, SHRM-SCP, is a Wisconsin-based business journalist with HR consulting experience.

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