What is a cafeteria plan?

A cafeteria plan is an employee benefit plan offered in the US which follows Section 125 of the tax code. Its name is derived from earlier plans that enabled employees to pick and choose between different types of benefits offered by an employer, as they would pick and choose among food choices in a cafeteria.

In 2005 the federal government announced that employers could design “cafeteria” plans that would reimburse claims for participants that were incurred up to 2½ months after the end of the year.  Before this, reimbursements were only valid for claims during the plan year. But with this new ruling,  a grace period was extended until March 15 to the employee participating in a Flexible Spending Account or FSA plan ending December 31 provided that the grace period was adopted by the employer. This new expansion of the claims reimbursement cycle reduced the  “use it or lose it” fear among many employees  and as a result increased the overall number of employees choosing to participate in an FSA. At the same time, employees were better able to target the funds for purchases that they actually needed. (more…)