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GOOD SMALL BUSINESS ACTIONLIST

Introducing a Cafeteria Benefits Program
Getting Started
Employee benefits plans are ever-evolving because of two things: the needs expressed by employeessometimes through their labor unionsand business competition. While compensation (salary, bonuses, stock options) has always been the big brother of recruitment, benefits have increasingly become the big sisterthe softer side of compensation but just as important. When money alone doesnt speak loudly enough, benefits often tip the scale in recruiting and retaining the best employees. Employers have offered some form of fringe benefits to employees for decades: medical insurance, paid vacations, and pensions being among the most prevalent. But as advocacy for employees welfare and competition for quality workers intensifies, the types and value of these benefit programs grows proportionally larger. There exist a variety of options between the old style benefits plans paid by the employer, and newer, more comprehensive ones paid for by employer and employee alike. The most flexible new ones are referred to as cafeteria plans.

FAQs
What is meant by cafeteria benefits? Basically, cafeteria programs (sometimes referred to as flexible plans) offer a wider array of benefits than traditional programs. The employee chooses from a menu of benefits based on his or her particular needs. For example, if an employee has health benefits under her husbands plan, she might choose to ignore this element of her employers benefits plan, instead allotting that portion of benefits to other things, like dental insurance, dependent care expenses, transportation, additional vacation time, flexible spending accounts (FSAs), or any number of on-site services provided by offsite vendors. In setting up a cafeteria plan, the employer must decide which benefit costs will be fully paid by the organization and which will be done on a co-pay basis. Likewise, the plan includes an extended list of voluntary benefits that are paid for entirely by employees. What sort of things should my organization consider when expanding basic benefits to a cafeteria plan? The first step involves research, both outward and inward. What is the norm in your industry? Your benefits plan needs to be as good as or better than your competitors to keep your best employees from defecting. Secondly, ask your staff what benefits they

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would most desire. This can be done through an employee survey and a small committee with representatives from throughout the organization. Finally look at the costs to implement the changes, and at ways in which those added costs can be offset with improved efficienciesor ways in which employees can shoulder some of the cost. What is a flexible spending account? Within the context of cafeteria plans, employees can dedicate a portion of pre-tax wages to a flexible spending account (FSA). There are at least two types of FSA: health care accounts and dependent care accounts. Their use is triggered when the employee encounters expenses that arent covered under the companys other benefits, say for eye glasses, specialized dental work, or nursing care for an injured dependent. The cost for care is then paid from the employees FSA. The value for the employee is that FSA contributions are deducted from wages, before taxes. Another benefit is that the employer normally administers the FSA for its employees. The drawback, however, is that whatever portion of the FSA that is unspent in the plan year is forfeited. Is there any value to the company, or is this just the increased cost of doing business? The best potential outcome from implementing a cafeteria program is improved employee satisfaction, which directly translates into reduced absenteeism and workforce turnoverwhich in turn leads to greater productivity and profits. Often, cafeteria plans allow employees to decide their benefits package as part of overall compensation. Some may choose higher salary and fewer benefits, while others may opt for added benefits in lieu of more money. There are advantages to encouraging benefits over higher wages. For example, providing group benefits may be less costly than giving everyone a rise, because the employer can usually get preferable group rates. The cost to the company is negligible, simply because employees themselves pay for many of the added benefits with pre-tax earnings! Thus, for qualified cafeteria plans, both the employer and the employee are able to realize substantial savings on new benefits, as well as a reduced tax burden on income. However, there is added cost to implement and administer an expanded benefits program, even if the cost of added premiums and services are paid with employees wages.

Making It Happen
Think Big and Be Inclusive Part of the reason old-fashioned benefits programs are taken for granted and are largely unappreciated is because they are perceived as a one size fits all. Recognize first that your organization has a rainbow of employees with dozens of personal preferences and circumstances. Begin thinking about a benefits plan that establishes greater choice for employees. Youll no doubt find them eager to participate. As mentioned above, it is important to enable people to voice an opinion about the benefits that would be most valuable. Whether this survey is done in-house or through an

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outside firm, employees must feel invited to the process; that translates into buy-in when the new plan is implemented. Among some of the more popular elements of a cafeteria programbeyond medical, vacation, and retirement benefitsare: child and dependent care costs term life insurance, auto insurance, pet insurance tuition assistance for advancing employees job skills and career outlook un-reimbursed medical, dental, eye care and preventive health care costs (such as massage, fitness club memberships) concierge servicesallowing vendors on-site to offer things like dry cleaning, dental and vision care, pet care, and auto washing While flexible work schedules are not really part of a formal cafeteria program, many employers look at this as part of the entire mix of benefits, because it is something that is increasingly appealing to employees. It is not so much the how many hours worked that people care about; its the when. In some instances, adding flexible work options to your existing benefits program may be enough. Consider the Administrative and Tax Implications The Internal Revenue Act of 1978, Section 125, gives employers a wide range of flexibility on benefits programs. The complication nowadays is that some or all of the benefits under a cafeteria program may be voluntary, that is, paid for by the employee from their flexible spending account. Some of the benefits are qualified and others are not. Qualified benefitsof which there are manyare able to be bought with pre-tax dollars. That automatically lowers the taxable income for the individual and the organization. For the employee, these benefits have the added value of not being taxable benefits. Benefits that do not qualify under Section 125 are taxable. Employers hoping to qualify their programs under Section 125 must have their plans scrutinized and must guarantee that there will be no favoritism or discrimination in the plan based on the job classification or salary range. Form 5500 must be filed with the Department of Labor, in which the details of the program are laid out. The Department then determines the programs status, identifying which benefits qualify under Section 125. To the employee, these benefits become part of a seamless program. To the employer, however, the qualified and non-qualified parts of the program really constitute separate entities. Thus reporting and record keeping are more complex. When considering broad, flexible cafeteria programs, it would be wise to involve outside professional advisors both in terms of the set up and administration of the program, but also in terms of knowing the tax consequences in advance. Do Your Homework and Communicate As always, trying to change the old for the new too quickly could create as many problems as ones youre trying to overcome. If you let employees know youre looking

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into an improved benefits program and ask for their input, that alone will have a positive impact on morale. It will also buy you time in which to gather the necessary data and formulate a quality plan that reflects the values and needs of employees. There are many well-respected companies whose particular focus is the development of such cafeteria programs. The Internet is a good place to begin researching the parameters you want to include, and further investigation will help you determine costs and how best to structure the program to give maximum value all round. Some Web links are cited below. As you decide on the new plan and begin to implement it, be sure to continue the high level of communication. There will be a term of adjustment and you will earn praise for any effort to keep people informedwhich will buy you grace should there be bumps in the road. It might even be wise to let employees know the true cost of the benefits programand the size of the financial burden borne by the organization on their behalf.

Common Mistakes
Doing Nothing Standing still is the same as going backwards, if organizations around you are forging ahead with new and improved benefits programs. While there are financial considerations and uncertainties with any new initiative, the prospect of no action is just as risky. If your organization banks its future success on attracting and retaining the best talent, you need to consider adding a cafeteria benefits program that is attractive and competitive. That said, buying a Rolls Royce plan in an industry that is accustomed to Fords could be a mistake. Research what is available, what your competitors are doing, and then scale your benefits plan accordingly. Look at your bottom line, profit margins, and the outlook for the coming year. Then, if necessary, budget the new benefits in modest incremental increases. Your employees will notice the effort and reward you with better work, even if you cant get there in one move. Also, think creatively; you may be able to outflank your rivals with a novel approach to benefits, rather than merely offering more of the same. Lack of Administrative Support It is preferable to phase a cafeteria program in than to aim too high and have to take back some early promises. Once your management team commits to moving ahead, make sure there are enough staff resources for the necessary research, development, and support for a cafeteria program. Invest early in expert advicefinancial and programmaticso that early missteps dont become lengthy and expensive fixes.

For More Information

Books:

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BUSINESS: The Ultimate Resource

January 2006 Upgrade 40

Rosenbloom, Jerry S. The Handbook of Employee Benefits. New York: McGraw Hill Professional, 2001. Harvard Business Review on Compensation. Boston, MA: Harvard Business School Publishing, 2001. Web Sites BenefitsNext.coman HRnext Web site: www.benefitsnext.com BusinessPlans, Inc: www.mycafeteriaplan.com Select Data Service Administrators: www.selectdataservice.com

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