Cafeteria plans were established in 1978 by Congress under Section 125 of the Internal Revenue Code. These plans are also known as "flexible benefit plans," "Section 125 Plans," and "flex plans." The terms refer to the control each employee has over selecting and paying for their own benefits. The employer establishes a menu of benefits that are available to their employees. Each employee then chooses the benefits in which they want to participate.

Using a cafeteria plan employees pay for the benefits they select before taxes are calculated on their wages. In other words, they get to use 100% of those designated dollars for benefits rather than using after tax dollars. With a minimum federal income tax rat of 15%, an FICA rate of 7.65% and, the State of Michigan Rate of 4.2% the savings are $26.85 for every $100 used for benefits.

Employers also save money. The matching 7.65% FICA tax is eliminated, as well as federal and state unemployment taxes, from every dollar your employees use in their plans.

There are three main categories of benefits that may be included in a cafeteria plan: insurance premiums, unreimbursed medical expenses and, dependent care reimbursement. Qualifying types of insurance are most types of health insurance (including major medical, cancer, accident, dental, visions, etc.) and term life insurance up to $50,000. The unreimbursed medical expense and dependent care reimbursement options allows and employee to set aside part of their pay to reimburse themselves for qualified expenses they incur. The unreimbursed medical account can be used to pay for major medical deductibles and co-payments and other medical, dental, vision related expenses not paid for by and employees insurance. The dependent care reimbursement can be used for day care expenses for dependents under the age of 13 or other dependents physically or mentally incapable of self-care. Up to $5,000 per year or, $2,500 if Married Filing Separate, per employee can be earmarked for dependent care expenses in a cafeteria plan.

The main advantage of these programs versus regular employee benefits, are the tax savings realized by both employees and their employer. By utilizing a cafeteria plan an employee can spend the same money for the same benefits they currently have and receive more take home pay.