About Cafeteria Plans: What You Need to Know?>

A "cafeteria plan" is an alternative to traditional health insurance that allows members to select the services on which their insurance money will be spent. As with all health insurance plans, there are both benefits and drawbacks to this type of plan.

What is a Cafeteria Plan?

A cafeteria plan is a form of health insurance that gives members the option to choose where the money they spend on health insurance is used. Plan members estimate the amount they want to contribute to their cafeteria plan each month, and it is withheld from their salary before taxes are taken out.

Cafeteria Plan Services

One of the main benefits of a cafeteria plan is its flexibility. If you opt for a cafeteria plan over a traditional health insurance plan, you can select from a wide range of health services, from acupuncture to dental work to artificial limbs.

Cafeteria plans often reimburse members for prescriptions and over-the-counter products, including contact lens solutions, ibuprofen and even cough drops. Additionally, some plans can be used to pay for child care.

Benefits of a Cafeteria Plan

Benefits to using this type of health insurance plan include:

• Affordability: Using a cafeteria plan allows small businesses or those without much profit to offer their employees a benefit plan.
• Options: Cafeteria plans often cover alternative health services that other health care plans won't cover.
• Personalization: Members of cafeteria plans can choose coverage that fits their individual needs and the needs of their family, whereas traditional health insurance plans cover a broad range of services that the employee may never use, but must pay for.
• Tax benefits: Money used towards a cafeteria plan is taken out before taxes.

Drawbacks of a Cafeteria Plan

Possible drawbacks of cafeteria health insurance plans include:

• Potential to over/underestimate amount: Once you decide how much money you want to put into a cafeteria account during the enrollment period, there are only a few circumstances that allow you to change it, such as marriage or divorce.
• Forfeiture of funds: In the event you do overestimate the amount or don't use all of the money in your account within two months after the end of the benefit year, you lose it.

Resources

Flexible Spending Accounts Online. (2010). Cafeteria plan: What is it and why should we care? Retrieved July 7, 2010, from http://flexiblespendingaccountsonline.com/blog/cafeteria-plan/.

Regan, M. (1996). Benefits of a cafeteria plan. Retrieved July 7, 2010, from http://www.physiciansnews.com/finance/1096.html.