What are Employee Cafeteria Plans and Why are they Failing You?

Sometimes, it takes more energy scheming than it does to simply abide by the norm. So, when it comes to employee benefits and compensation, it’s important to remember that the medicine should not be worse than the cure.

Cafeteria plans have benefited employees and their organisations for decades but have come under scrutiny as of late. That is, these schemes operate differently according to many industries and companies. 

But what went wrong? What we’d like to understand is why these schemes no longer work in the way that they had originally been intended.

What are they?

These come under numerous categories and titles, depending on where you are from, but employee cafeteria plans are effectively benefit schemes.

Salaries on the one hand, are taxable, whereas certain forms of compensation are not, or are heavily discounted. By selecting these, employees can opt for using such benefits which allow both the individual and the employer to be spared from having to pay certain income taxes.

They all started in the 1980’s, and have been a mainstay in the US, listed as Section 125 plans. Of course, these have other names in different countries. Of the most common benefits, cafeteria plans offer healthcare insurance.

Today, they can be company cars, sports club memberships, travel vouchers, and more. The main feature of these programmes are the tax advantages for the business and their employee.

Why they became popular:

Cafeteria plans, foremost, have allowed workers to divert a portion of their pre-tax salary for fringe benefits. This results in less official income from which they must pay taxes.

It’s hard to argue against tax relief. After all, any financial benefits are sure to bring value to anyone’s wallet. In many cases, employees select flexible spending arrangements, as part of their pre-tax premium conversion plans.

Oftentimes, workers also opt for a full-flex plan, which provides a menu of options from which they would otherwise pay for externally. This list of benefits includes multiple insurance providers, coverages, cash reimbursements, or vacation days.

When reviewing the advantages and disadvantages of a cafeteria plan, it’s also essential to remember to honour the universality principle. In this case, such schemes should not discriminate in benefits, contributions, or eligibility. Though, with all the supposed accessibility, these plans have grown to become a double-edged sword.

Let’s find out why this is the case.

Unpacking the true costs of the employee cafeteria plan.

Cafeteria plans’ waning popularity

Times have effectively changed. The working environments of the 1980s, or 1990s no-longer abide by the same arrangements. For instance, many employees can select full-time contractual work, but it is increasingly being supplanted by part-time or per-project basis arrangements.

With that said, individuals who are de-facto employees, but may still find themselves disqualified from company benefits. Thus, they can find themselves ineligible for cafeteria plans, as companies can only offer them to full employees.

Hidden restrictions

Another aspect that gives reason to the diminishing appeal is the ‘fine print’. In some cases, beneficiaries may find themselves to be inconvenienced because the arrangements apply only for a limited time, with blackout dates or extended grace periods for medical coverage.

Financials are a significant pain point as workers become increasingly wary of the hidden conditions of ‘freemium’ products. This entails purchasing at low initial fees, before subjecting to unanticipated costs, which are necessary for activating the service, to make it usable. Out-of-pocket expenses for services within such plans have become significant drawbacks - leading to workers increasingly turning away from them.

Complications and compatibility issues

The sheer administrative complexity has rendered many plans inflexible and incompatible with the changing requirements of the employee. By combining a broad scope of fringe benefits, most employees are locked into their cafeteria plan for an entire year.

Compliance issues with 3rd party vendors can also add unexpected complexity to a cafeteria plan. When personal circumstances change, such as medical emergency, or childbirth, many agreed-to conditions could suddenly become invalid. Through such examples, it becomes apparent that many benefit schemes fail to reflect the day-to-day realities of the plan’s beneficiary.

Employer burdens

Businesses must communicate updates and changes to benefit schemes, which includes a summary plan description. The challenge will be to remain on-top of each component and notify users immediately, requiring a continuous commitment on the part of the employer. Applying this diligence requires resources, and transparency, which can overwhelm an organisation.

The competitiveness of a well-functioning cafeteria plan results in significant costs for companies, which could severely impact revenues. As such, it may also require more financial liquidity for businesses.

Determining the next steps

Whilst a cafeteria plan can create benefits for both the employer and the employee in the short to medium term, the complexities and limitations can far outweigh the benefits of the system.

Firstly, it’s important to note that employees are also capable of making poor choices, due to a lack of experience in terms and conditions. To their detriment, this can lead workers to find themselves without cover for predictable emergencies. Whilst perfectly in the right of the company, the dissatisfaction can nevertheless lead to a negative public opinion.

Your company can mitigate increased administrative burdens by conducting a self-evaluation of whether the organisation is experienced enough to even consider offering cafeteria plans. Those better-equipped organisations should offer a better capacity to commit resources in maintaining communications and a higher quality of services. Those that struggle to provide committed service, should refrain from offering benefits to their employees.

In this age of greater flexibility and worker demands, users are accustomed to tailoring products to their lives.  For this reason, workers only seek out the benefits they will use. Employees simply need to take this into account. As with any such system, the same is true here: quality will always beat quantity. Use this principle to your advantage now.