The laws governing cafeteria plans are detailed and complex; there are many rules and exceptions.  The rules can be vague, even contradictory.   Serious legal consequences can result from interpreting them incorrectly.

 Cafeteria Plans are one of the most popular benefits ever!  Employees appreciate the plan because they can purchase benefits with pre-tax dollars, which results in an increase in their take-home pay.  Employers like Cafeteria Plans because they also save on taxes.  An Employer that offers a Cafeteria Plan to their employees attract the best employees!

It all sounds too easy to be true, right?  Well, the IRS doesn’t give tax breaks without making you work for them.  Here’s what you’ll need to do to establish a Cafeteria Plan.

Step 1 Establish your Plan parameters
Step 2 Have your Plan Document and Summary Plan Description prepared
Step 3 Adopt the Plan
Step 4 Distribute the Communication Materials to the employees
Step 5 Obtain Election Forms from employees
Step 6  Instruct  payroll to make pre-tax deductions
Step 7 Provide Insurance Coverage

What are the consequences of not setting  your Cafeteria Plan correctly?  The IRS could deem that your Plan does not qualify and all the taxes previously avoided by the employer and the employees could now have to be paid.  In addition to losing favorable tax treatment, there may be substantial adverse consequences for the employer as well.