Blackwell Reference Online

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Employee benefit programs that offer some degree of choice to employees in selecting types and levels of coverage first appeared in the mid‐1970s. Initially employers were motivated to satisfy diverse needs of increasingly heterogeneous workforces. Plan adoptions accelerated in the 1980s as employers realized that the plans were more cost‐efficient than traditional benefits . Effectively, employer subsidies can be limited to the costs of basic coverage. Employees can supplement this core by contributing more or, alternatively, choose lower levels and receive cash or credits to apply to other benefits. Any plan that allows employees to make benefit choices is a “flexible” plan, but only plans that also allow choices between certain benefits and taxable compensation (e.g., cash) without causing the otherwise nontaxable benefits to become taxable are “cafeteria” plans. Section 125 of the Internal Revenue Code (IRC) specifies benefits that can and cannot be included in cafeteria plans and rules for insuring a tax‐favored status. Currently, most flexible benefit plans are cafeteria plans. At a minimum these plans include: (1) a premium conversion option which allows employees to pay premiums for health benefits on a pre‐tax basis; and (2) pre‐tax employee contributions to flexible spending accounts (FSAs). Money can be withdrawn throughout the year to pay for healthcare and/or dependant ... log in or subscribe to read full text