How is a cafeteria plan established?

In planning for the implementation of a cafeteria plan, employers may want to consider a number of factors in planning for the implementation of a new cafeteria plan. These include such factors as the company's long-term commitment to administering a cafeteria style benefit plan, the selection of benefits, employee input, and administrative procedures.

Considering the potential complexity and uniqueness of a flexible benefits plan, a large amount of planning may be required to implement the program successful. Companies that decide to use cafeteria plans must design systems suited to their specific needs.

Implementation checklist. An employer implementing a cafeteria plan should follow these steps:

1. conduct a feasibility study;

2. draw a detailed plan design;

3. implement a menu system;

4. begin to conduct actual plan operation;

5. manage ongoing administration; and

6. review the program periodically.

Feasibility study and tentative design. First, the employer should undertake a feasibility study, reviewing design alternatives and judging the expected results of the various alternatives.

At this stage, the employer should estimate total costs and determine the extent to which the organization will support such a project. In considering the costs of administering the program, employers should note that the number of benefits offered and their complexity will have an impact on how much it will cost to run the plan.

The extent of benefits to be offered under the plan should be considered at this time.

Employee input. Small, workable group sessions with employees in which the tentative plan design is reviewed can provide good feedback for the employer. Meetings with employees are also good opportunities to communicate current benefit costs and long-term objectives to employees.

Employee input can also be obtained through the use of questionnaires, telephone interviews, focus groups, and team meetings. An employer may also want to solicit the opinion of spouses and dependents.

Remember that once employee opinions are sought, employees will assume that their employer will consider their needs, as expressed by them, in designing the plan. After employee input is solicited, it is a good idea to make use of the input or else be prepared to explain why employee suggestions were not implemented.

The elections made by employees under an ongoing cafeteria plan are also a form of employee feedback. Tracking this information can provide valuable information for employers in terms of whether plan objectives are being met.

Detailed design of plan. If the feasibility study proves fruitful, the next step is to draw a detailed design of the program. Here the focus is on costs of the program but all aspects of the cafeteria plan's implementation should be considered.

Menu system implementation. Implementation of the menu system is the next step. This includes the task of designing the enrollment system. Employees can be permitted to enroll by phone, computer, or written form. The employer or administrator needs to adopt an enrollment form, workbook, or system that may include:

• a description of available benefits;

• a set of prices for benefits;

• a comparison of the features of each benefit;

• a worksheet for employees to use in evaluating their choices; and

• an election form to be signed by employees.

The task of implementing the menu system also includes creating or adapting an ongoing administration system, developing communications channels, drafting the necessary paperwork, and filing appropriate regulatory documents. Paperwork issues include determination of the method of employee expense reimbursement under the cafeteria plan.

Actual plan operation and ongoing administration. The actual operation of the cafeteria plan program includes the enrollment of plan participants. Plan operation may also require flexible benefit credits to be calculated and allocated to the participants.

The main focus of ongoing administration is keeping employee records, such as family status, pay status, job position, and employee choice forms, up to date. Administrative costs come in the form of added paperwork, additional personnel for counseling employees as to their choices, additional time to determine equivalent values under different plans, and added attention to delivery of information about the flexible system.

Administration problems may involve payroll issues, claims processing, and employee leaves of absence. For example, employees may submit incomplete or illegible requests for benefits or requests that lack receipts. These types of problems should generally be addressed before the cafeteria plan is implemented. At some point, the employer will have to consider whether it should administer the cafeteria plan in-house or outsource the administration.

Review plan periodically. The cafeteria plan should be reviewed on a periodic basis. The program should be tested against cost standards and evaluated to determine whether it is meeting the needs and expectations of employees. Changes or enhancements should be implemented accordingly.