Cafeteria Plan

Introduction

Under the section 125, a cafeteria plan is a compensation formula that allows the worker to call itself the conditions of his income, according to its own needs. A worker may, as in a cafeteria, compose his own menu from the different proposals: higher pay, more leisure time, more pensions. Overtime it can be converted to days off, and increased salary can be exchanged against a company car.

In the year 2005 the Internal Revenue Service committee announced that from immediate effect employers are allowed to design and implement the cafeteria plans in their businesses that enable employees to reimburse for claims that incur up to 2.5 months after the plan year is closed. Before this announcement, reimbursements allowed only for claims that incurred while the plan year was in effect. However, after the notice, an employee who participates in the cafeteria plan and in Flexible Spending Account plan ending December 31 is eligible to still receive reimbursement for claims that incur through March 15 if the employer grants the extended grace period.

The major advantage of cafeteria plans is that they can meet your specific needs. Your situation may in fact change very quickly, it may be that you are very interested in a company car when you started, but you prefer to choose a child care when you get a few years later (Vroom, p.28).

In a cafeteria plan, a premium global budget is planned for all affiliates. Each of them can freely distribute the budget among the different guarantees, capital supplementary pension, life cover, income protection, waiver of premium.

There are several administrative procedures that must be met to comply with Section 125 code legal requirements.

Establishment of Plan Document

This particular document designed for plan, contains the specific details, such as an explanation of the employee benefits that are covered through the plan, annual limits, participation rules, election procedures, and eligibility. The plan year is also defined.

All Participants Must Have a Summary Plan Description (SPD)

Under the Section 104(b) of the (ERISA) Employee Retirement Income Securities Act of 1974, underlines the fundamental law intended to protect the rights of participants and beneficiaries of benefit plans of employees. It requires that a Summary Plan Description must be distributed to all the employees under the cafeteria plan, not more than 90 days after the person becomes an employee and part of the organization or within 120 days of the plan becoming subject to ERISA. An employee's beneficiary should also get the Summary Plan Description within the 90 days after employee becomes eligible for all the benefits underlined in the plan. The Summary Plan Description summarizes significant details of the plan, such as filing claim procedures, information of plan sponsorship and administration. Further, after distributing it to the employees and their beneficiaries, employer must also file the claim with the Department of Labor within the 120 days of the plan's effective date.

Attending On-going Compliance

The laws are constantly changing and being updated. Federal legislation requires that section 125 plans can't discriminate as to eligibility and benefits ...