Introduction
Finance is a decisive point in the budget of every business company that aims at being successful and highly developed. When proper attention is paid to the financial affairs of a company, it develops in the right direction and uses its funds with the highest degree of efficiency. Finance is the basis for the existence of every company and it demands close attention from the side of the managerial staff and chief executive officers of a company.
The same can be said about the ability of a company, and namely its managerial staff, to spare and save money that can be used for other purposes with more effect. It is therefore right that the company with smaller funding can reach bigger success thanks to the ability of its managers to use the funds properly. At the same time, the company with great funding can be at a rather low level of development due to the inability of its managers to use money and to direct funding to the areas that demand it most of all at the moment (Perry and Cayer, 1999, p. 107).
Moreover, the benefit that employees of the company can get from its ability to use funding properly should not be underestimated. It creates a better atmosphere in the company and causes an increase in its efficiency and productivity. Thus, each company needs a certain program or plan to structure and outline its expenses and costs for a certain period of time. One of such programs is the so-called “Cafeteria Plan” which is the topic of this paper (Perry and Cayer, 1999, p. 107).
In this work, I am going to outline the essence, main principles, and usefulness of the Cafeteria Plan. I will focus on the definition of the plan, on the main types of the plan that are differentiated according to their spheres of activity, and on the major benefits that the so-called Cafeteria Plans can bring to employees and their employers. I will also outline the main steps that are to be taken in order to implement the Cafeteria Plan at our company if necessary.
Background
Cafeteria Plan Essence
The main point of the so-called Cafeteria Plan is that, according to it, employees can save a considerable percentage of their incomes without paying taxes for them, and the employers can save money as well because they do not have to pay taxes for the untaxed incomes of their employees. This seems rather complicated at the first sight but closer consideration discloses all the details of the Cafeteria Plan. Moreover, there are several types of Cafeteria Plans and each of them also has its own advantages and disadvantages, but they both possess certain peculiarities (Fiore, 1998, p. 74).
The name for the plan is derived from the essence thereof. In other words, Cafeteria Plan is a rather ironic comparison of the benefits offered by the plan to employees with the menu in a cafeteria where people choose what they would like to have. However, there are some other terms that mean one and the same notions – the plan that helps people save and increase their actual incomes every year. Among those terms, there are such notions as Section 125 Plan, Premium Only Plan, Flexible Spending Account, etc. All the notions are similar in essence but have distinctive features that allow us to use them concurrently (Fiore, 1998, p. 74).
Cafeteria Plan Operation
Now, let us see the procedures that make the Cafeteria Plan such a beneficial means of financial regulation of an organization. The first, and the most important point, is that Cafeteria Plan allows saving the pre-tax money, i. e. money from the salaries that have not been received by their addressees. A person can choose to contribute a part of his or her salary per month to a specially created reimbursement account and use this account in order to get access to the qualified benefits.
The qualified benefits are health insurance, dependant care insurance, child-care insurance, pension programs, etc. which become more accessible to employees as far as they do not have to pay taxes from these sums of money and have more take-home incomes to spend on whatever they want or need.
The employers also benefit from the Cafeteria Plan as far as they save the money they would otherwise spend on the taxes paid for their employees (Fiore, 1998, p. 74). For instance, if a salary of an employee amounts to $20, 000 per year, all taxes will take over 40% of the sum, i. e. over $8, 000. In comparison, if that employee decides to contribute $5, 000 to the reimbursement account for the purposes of the Cafeteria Plan, the taxes he or she will have to pay will be calculated for the resting sum of $15, 000 and will amount only to $6, 000 (Ozello, 2000, p. 88). The whole picture of the usefulness of the Cafeteria Plan can be seen from the following table:
Use for Employees
This table means that if the level of income per year is average $20, 000, a person participating in Cafeteria Plan will save $1, 883 by means of avoiding tax payments from the sum of money he or she would in any case spend on the qualified expenses.
Thus, it is clear that if the level of income of a person is higher, the usefulness of the Cafeteria Plan is also higher. This all is the result of the simple and understandable essence of the Cafeteria Plan – a person needs to determine which sum will probably be spent by him or her on the qualified expenses in the coming year and contribute this sum from his coming salaries to the reimbursement account beforehand. As far as that sum has not yet been received by this person it is not subject to any tax and will be used by the person to a full extent (Ozello, 2000, p. 88).
Consequently, the rest of the salary is smaller and taxed for it are smaller as well. As a result, the rest of the salary that remains after all the taxes are paid is larger than it could be if no Cafeteria Plan was used by this person. So, the take-home income of this person increases as a result of his or her participation in the Cafeteria Plan and contributing to the reimbursement accounts of his or her company. Besides, the considerable sum of money is saved by means of the Cafeteria Plan, and the higher the income rate is, the larger is the sum that is saved by the person. It is on average 10% of the salary per year but can reach the figure of about 20% depending on the income level and the amount of contribution made by the person to the reimbursement account of the firm (Fiore, 1998, p. 74).
Thus, the employees of the company that implements the Cafeteria Plan are at a larger advantage than those whose companies try to save money by simply cutting salaries without offering any reimbursement to employees. This fact affects not only the living standards of the employees but as well their wish of work and consequently the efficiency of the production process of a certain company (Perry and Cayer, 1999, p. 107).
Use for Employers
The first use for employers was mentioned in the previous section. It is the increase in the efficiency of the company’s work and its further increase of competitiveness in the market. But, needless to say, there are other benefits for the employers who decide to take up Cafeteria Plans for their employees. The most significant one is the saving of money that would otherwise be spent on taxes. It goes without saying that every employer pays a considerable amount of money as taxes for every employee he or she employs. These taxes become larger proportionally to the level of salary. Thus, if a person has a high salary, his or her taxes will be quite high, but if the salary is cut in this or that way, taxes are cut as well (Ozello, 2000, p. 88).
Certainly, there are no workers who would willingly observe the cutting of their salaries. That is why the employers pursue two purposes simultaneously – they cut their expenses on tax payments for their employees and present new possibilities to these employees who can access services that were too expensive for them before. As can be observed, this point is of double, if not to say of triple, use for the employers. Firstly, they cut their tax payments for the employees. Secondly, they cut the salaries and save money to invest in some other spheres of the company’s activity. And thirdly, they retain the positive image of employers among employees making their work more productive (Ozello, 2000, p. 88).
Types of Cafeteria Plans
If it finally decided to implement the Cafeteria Plan in our company, it would not be out of place to study the types of Cafeteria Plans. They are divided into two major types according to the extent they are applied to. In other words, they are Premium Only Plans (POPs) and Flexible Spending Accounts (FSAs). The former is the simplest type of Cafeteria Plan because it does not offer any benefit except law taxes due to the deduction of premiums from workers’ salaries which allows them to have larger take-home payments. The latter is much more attractive to employees as it allows them to use the deducted money for the health care and children care services that are not covered by their licenses (Fiore, 1998, p. 74).
Conclusions
Thus, there is the choice for any firm whether to implement the Cafeteria Plan or not. The main alternative to it may be the cutting of salaries if there are financial problems in a company, but this is a rather unpopular measure and it brings little result. I am convinced that the implementation of one of the types of the Cafeteria Plan will be a great advantage for our company. As can be clearly seen from the above-presented information, the usage of the Cafeteria Plan is rather beneficial for both sides – employees and employers. The former can save their take-home incomes and save money for their health- and child-care services.
The latter are able to save tax payments and direct this finance to other important spheres of the company’s activity and increase the effectiveness of the firm’s operation. Of course, there are certain legal aspects allowing the implementation of the Cafeteria Plan. They are the establishment of the plan document, distribution of its copies to all employees, and plan’s compliance to the constantly changing legislation of the United States.
References
Fiore, N. (1998). New Rules for Accident and Health Insurance Cafeteria Plans. Journal of Accountancy, 185(4), 74.
Ozello, J. (2000). IRS States Position on Hybrid Plan Arrangements. Journal of Accountancy, 190(3), 88.
Perry, R. W., & Cayer, N. J. (1999). Cafeteria Style Health Plans in Municipal Government. Public Personnel Management, 28(1), 107.