Cafeteria Plans

Cafeteria plans allow employees to select from a menu of fringe benefits - which often includes the choice of cash as an entree - to tailor a personalized package of benefits. The plans have become increasingly popular as husbands and wives with duplicate benefits seek ways to trade in unnecessary items, such as double medical coverage, for more desired benefits, such as additional life insurance or dental coverage.

If you choose cash under such a plan, it is taxable income. If you choose tax-free benefits, their value is not included in your salary, and you therefore avoid the extra tax.

A popular selection on some menus - and sometimes a stand-alone benefit - is a reimbursement account. Also known as a flexible-spending account, these plans are funded through employee salary reduction, with the money going to pay certain expenses, such as medical and child-care costs. The advantage is that money going through the account is invisible to the IRS, so there's no income tax, no social security tax and, in most states, no state income tax either.

These plans require an employee to elect in advance how much salary to deflect for designated benefits. Another condition is that any amount left in the account at year-end must be forfeited. Using such an account for uncertain expenses - such as medical and dental bills - is somewhat risky. But there's little danger for such predictable costs as child-care expenses. Also, the tax benefits are so great that, depending on your tax bracket, you could forfeit 20 percent or more of the salary diverted to the plan and still come out ahead.

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