Church Cafeteria Plan
Cafeteria plans are defined under Section 125 of the Internal Revenue Code as plans maintained by the church that allow each participant to select among cash and one or more qualified non-taxable benefits. This is the technical definition, but in practice a cafeteria plan (sometimes called a flexible benefit plan) is a benefit plan that allows an employee to have some choice in designing his or her own benefit package by selecting different types and/or levels of benefits that are funded with nontaxable employer dollars.
How does a Cafeteria Plan Work?
The most common type of cafeteria plan provides a basic core of benefits including medical and life insurance, daycare, dental, sick leave or disability benefits, plus a second layer of optional benefits. At a minimum, the basic benefits should provide a reasonable level of protection against the major sources of personal risks. The employee can select the core benefit, or alternatively, purchase a higher level of benefits with cafeteria dollars. The plan might also add benefits that were not previously offered as options.
Each employee is allotted a predetermined number of dollars or credits with which he or she may purchase benefits from options made available by the church. If the dollar amount allotted by the church is inadequate to purchase the desired benefits, some plans allow employees to make additional purchases with before-tax contributions through payroll deduction.
What Benefits can be Included in a Cafeteria Plan?
Benefits which can be offered in a cafeteria plan include most benefits ordinarily resulting in no taxable income to employees if provided outside of a cafeteria plan. Some examples are: health, dental and life insurance, daycare, accidental death and dismemberment coverage, disability coverage and vacation leave. One exception, group life insurance in excess of $50,000, which is normally taxable, can be included. Although the inclusion of life insurance coverage is permitted, the amounts in excess of $50,000 continue to be taxable.
Example of Employee Savings From an FSA
Following is an example of savings to the employee generated through an FSA account. (Note: Savings will differ for each employee depending on family income, the amount of the reduction, and the state tax rate).
| Projected Expenditures | |
| $1,040 | Premium ($40 every 2 weeks) |
| $350 | Deductible |
| $150 | Vision Care |
| $100 | Dental |
| $80 | Prescription Drugs |
| $1,720 | Total |
The employee decides to put $1,500 of salary into the FSA. The amount is conservative (less than projected expenditures) because of the "use it or lose it" rule. Assuming a 28% federal tax rate, 5% state tax rate and at least $1,500 of qualified expenses, annual savings would be $724.50, computed as follows:
| Tax Savings | |
| $420.00 | Federal Tax: 28% x $1,500 |
| $75.00 | State Tax: 5% x $1,500 |
| $229.50 | Social Security Tax: 15.3% x $1,500 |
| $724.50 | Total |
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