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Cafeteria Plans
The aging of the U.S. work force is causing dramatic shifts in employee needs, presenting opportunities for employers that can respond quickly with benefits strategies tailored to these changing needs.
For example...
A 25-year-old technical worker who is newly married with 1 small child probably requires different benefits than a 55-year-old technical worker whose children are grown and has a working spouse.
The most effective way to deal with individual variability in benefit preferences is to allow each person to decide what benefits they need and how much money to allocate to each. This is called a cafeteria plan, sometimes referred to as a flexible benefit plan.
| Cafeteria Plans | The employee is assigned a dollar amount of compensation, or a set of credits based on salary, seniority, and age that he or she can divide among a variety of benefit options. Unused credits may sometimes be converted to cash compensation. |
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Implementing personalized benefits is not without complications, however. First among the challenges is cost. In addition, education and guidance for employees must take into consideration the diversity of employees to include their levels of education, grasp of financial concepts, and preferences.
The cafeteria approach offers advantages to employers and employees.
| Employer | Employee |
|---|---|
| There's a clear focus on the total cost of benefits for each employee. This cost can be more easily controlled by assigning a dollar amount to each person. Plus, there's more potential for tying rewards to membership, which is desired by management. | Needs and preferences can be better accommodated. Further, the employee is making the decisions and so should be more aware of the benefits and more committed to controlling costs. |
Still, there are a number of drawbacks to cafeteria plans:
- Accounting becomes more complex. Payroll is made much more complex by each person having different deductions and eligibility. Administrative reporting to insurance carriers is complicated due to the variety of benefit options available.
- There are increased costs. Insurers develop their programs on the assumption that all employees will be covered. Therefore, underwriting these plans becomes more difficult, and costs may increase.
- Unions try to have everyone treated alike and may resist this approach.
- There may be concerns about employee decision-making as they take on the responsibility of having to make choices. This concern runs in two directions. On the one hand there are concerns that the employee will choose very few benefits and focus on maximum cash, which they will regret if they become sick or when they get older and need retirement funds. And on the other hand there's a concern that employees may choose too many benefits and thereby distort the membership rewards. They would wind up receiving less cash compensation.
So cafeteria plans may require more expense in their administration than they are worth in goodwill or benefit to employees.
Memory Jogger
Cafeteria plans have the advantage of: