Do you know what your employer is cooking up for you? Flexible benefit programs, also known as "cafeteria plans," are rapidly becoming part of the finer bill of fare, as companies everywhere try to keep their employees satisfied.
Many experts also believe cafeteria plans may be the best way to solve the high cost of providing adequate benefit coverage."The term cafeteria plan refers to flexible benefit packages, which, like a cafeteria, allows employees to pick and choose the benefits that most fit their needs and tastes," said Alfred Candrilli, director of compensation consulting for Laventhol & Horwath in Chicago.
Cafeteria plans offer employees a full menu of benefits, including savings plans, deferred profit sharing, group life and medical insurance, flexible vacation days, child day care, dental coverage and a number of other perks.
Typically, the IRS does not consider benefits as earned income, so bonuses, incentives and fringes can be received as pay without ever appearing on an employee's W-2 form.
Also, since employees pick and choose among types of benefits and levels of coverage, they know exactly what they can expect from their employer and have a greater degree of control over their own future.
"To make choices, employees must understand their benefits," said Christine A. Seltz, co-editor of Fundamentals of Flexible Compensation (John Wiley & Sons, New York). "The process of becoming more involved in their plans definitely boosts employee morale."
Another advantage of flexible compensation is that it is adaptable to the rapidly changing demographics of the workforce. Twenty or 30 years ago, the average worker was a middle-aged man, head of a traditional household and interested primarily in security benefits to help him provide for his family.
Today, it is virtually impossible to describe the "average" worker. More than 22 percent of the work force now consists of single-parent households, and two-income families total about 65 percent of today's working population.
This shift in the American work force has created special problems for employee benefit programs, because each type of household has different needs.
"One universal benefit program can no longer do the job," said Thomas E. Wood, chairman of the Corporate Board for the International Foundation of Employee Benefit Plans and one of the originators of flexible compensation.
Experts estimate the costs of non-flexible benefit plans increase each year by more than twice the present rate of inflation. On the other hand, flexible benefit plans help control price inflation by limiting overall costs, especially in the area of health benefits.
"If two different employers of a working couple both offer family health plans, the money spent on one of the plans is wasted," said Candrilli. "The husband or wife should be able to convert the cost of the wasted health benefit into something that the couple can use. It could be more vacation time or even cash.
"Why should a young single man be receiving family dental or maternity coverage when he might prefer a car allowance? Needs are different. Benefit options should reflect those needs," Candrilli said.
Flexible compensation became available under the Revenue Act of 1978. Section 125 of the Internal Revenue Code allowed employees to trade taxable benefits, including cash, and non-taxable benefits, without causing the entire amount to be recognized as taxable income.
Now flexible compensation plans are on their way to becoming the dominant benefit strategy in the workplace.
"On Flexible Compensation," a quarterly publication by Hewitt Associates, estimates there are now 1,000 major companies (500 or more employees) offering flexible compensation plans, compared to only 23 before 1980.
New trends in flexible compensation include increased eligibility, sometimes for part-time and hourly workers, and a wider variety of benefits.
While no one plan can solve every benefit problem, flexible compensation comes pretty close.
For more information on flexible compensation, you may contact Hewitt Associates, 100 Half Day Road, Lincolnshire, IL 60015, (312) 295-5000.
To order Fundamentals of Flexible Compensation, edited by Christine A. Seltz and Dale L. Gifford, contact Ken Gesser with John Wiley & Sons, New York, at (212) 850-6089.
Reader questions will be answered and may appear in this column, when mailed to Gary S. Meyers at 20 W. Hubbard St., Chicago, IL 60610.