More CHROs are investigating cafeteria plans for benefits. Should you, too?

CHROs and benefits leaders are increasingly considering so-called cafeteria plans, experts say, as a way to both save organizations money and provide flexible benefits to employees and potential hires, a key hiring and retention tool in today’s challenging labor market.

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Also known as Section 125 plans in reference to the IRS code that regulates them, cafeteria plans allow employees to apply employer-allocated credits or funds toward their preferred choices from a cafeteria-style list of taxable benefits. Such benefits can include gym memberships and event tickets, as well as nontaxable benefits, such as group health benefits, HSAs, and more.

The plans offer tax advantages for employers and employees. Employee contributions are withheld on a pretax basis for nontaxable selections, according to a report by ADP, reducing an employee’s taxable income and lowering federal income tax and other taxes.

Julie Stich, International Foundation of Employee Benefit Plans
Julie Stich, International Foundation of Employee Benefit Plans

“Over the last few months, I’ve heard more people starting to talk about cafeteria plans again,” Julie Stich, vice president of content at the International Foundation of Employee Benefit Plans (IFEBP), tells HRE. “They were prevalent over 30 years ago but stopped being popular because they were administratively complicated to handle. Now, there’s talk of them again because it would help with the personalization of benefits.”

Currently, just 5% of employers offer full cafeteria plans as described above, says Beth Umland, director of research for health and benefits at Mercer, citing its 2023 National Survey of Employer-Sponsored Health Plans, which received more than 1,900 responses from employers.

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An additional 1% of employers surveyed offer a variation of the cafeteria plan that requires employees to select a health plan before they can use the remainder of their credits or funds for other benefits in the plan, Umland says.

Today, new CHROs or new heads of total rewards who worked at companies with cafeteria plans in the 1990s are generally making these inquiries, says Maura Cawley, sub-market segment leader at Mercer.

“They’re suddenly asking, ‘Why aren’t we doing X, Y or Z?’ And cafeteria plans are among those questions,” Cawley says.

But are these benefits plans, originally popular in the 1990s, such a great idea?

Challenges with cafeteria plans

Maura Cawley, Mercer
Maura Cawley, Mercer

Probably not, experts say. That’s because cafeteria plans remain just as complex to administer as they were in the 1990s. Another obstacle emerged in 2010 with the Affordable Care Act and related legislation: the possibility of incurring IRS fines if they miss ACA-related targets related to affordability, according to a report by insurance solutions provider Keenan & Associates.

“It’s a great concept, and employers like the idea that people have flexibility, but in this kind of regulatory environment, it doesn’t support the concept very well. Also administratively, it ends up being super-complicated,” Cawley says. “In the end, after going down this path with clients, they kind of go, ‘There isn’t enough juice to make it worth the squeeze.’ ”

Learn more about financial wellness at the upcoming HRE Elevate People, Ignite Change (EPIC) Conference on April 24-26 in Las Vegas. One session, Mitigating Financial Stress in a Paycheck-to-Paycheck World, features Aaron Fox, vice president of commercial at Ceridian’s Dayforce Wallet.

Dawn Kawamoto, Human Resource Executive
Dawn Kawamoto
Dawn Kawamoto is HR Editor of Human Resource Executive. She is an award-winning journalist who has covered technology business news for such publications as CNET and has covered the HR and careers industry for such organizations as Dice and Built In prior to joining HRE. She can be reached at [email protected] and below on social media.