This file was prepared for electronic distribution by the inforM staff. Questions or comments should be directed to inform-editor@umail.umd.edu. "Cafeteria" Benefits What Are Cafeteria Benefit Plans Cafeteria benefit plans (or as they are sometimes called, flexible benefit plans) give employees the opportunity to have some say in what fringe benefits they receive through their jobs. More specifically, under a comprehensive cafeteria plan, employees choose from a "menu" of taxable and nontaxable benefits those that best suit their individual needs, preferences, or lifestyles. Typically, some basic level of benefits is designated as the "core" benefit level (which all employees must have, such as minimum vacations, sick leave, and pensions), while others are deemed optional. Employees receive credits (based on salary and tenure) which they use to purchase enhanced core benefits (e.g., extended major medical coverage, extra vacation time); use for optional benefits (e.g., day care, long-term disability insurance); or, in some cases, convert into additional cash. Cafeteria plans are becoming an increasingly common part of many employers' benefit packages--one recent survey indicated that 22 percent of all employers with 1,000 or more employees had flexible benefit plans in 1988, with projections that this would increase to 33 percent by 1990.78 As explained below, the reasons for this are fairly straightforward--costs and competition. Employers like cafeteria plans because they provide a means to control the cost of fringe benefits. Since the employers set the level of core benefits and the value of the credits which their employees will receive, the employers know up front what their fringe benefit costs will be. Employers also like cafeteria plans because the plans can improve employee satisfaction, thus giving the company an edge in recruiting and retaining valued employees. As one corporate executive put it, "The buzzwords of the '90s are 'work and family-life considerations,' which translates into more and varied work and payment options. If you don't offer the flexibility that [people want], they'll go across town to a competitor who does." -79 From the employee's perspective, cafeteria plans are generally desirable because they provide the chance to tailor one's benefits to one's personal or family needs. In the past, employers often structured their benefit plans assuming the traditional family structure of working husband and homemaker wife. As a result, the needs of single parents, working women, two-earner couples, and others whose needs don't match this traditional model often weren't being met. In some circumstances, however, employees are less than enthusiastic about cafeteria benefit plans. Specifically, when employers use cafeteria plans as a means to cut or curb fringe benefits, employees may view the tradeoff between added flexibility and lower total benefits as a negative rather than positive factor. Federal Initiatives to Implement a Cafeteria Benefit Plan In the recent past, there was at least one occasion when OPM considered a cafeteria benefit-type program for Government employees. This proposal did not get very far, however. Specifically, OPM received an agency inquiry in 1987 concerning whether the Federal Government could establish a type of flexible spending account known as a "dependent care assistance program." These programs are authorized by the Internal Revenue Code. They provide a means through which employees can pay for certain kinds of expenses (e.g., child care) with pretax dollars rather than after-tax dollars, thus transforming the expense item into a nontaxable fringe benefit. OPM referred this inquiry to the Internal Revenue Service, which determined that nothing in the tax code prohibits the Federal Government from having a dependent care assistance program for its employees. Thus, if OPM wanted to sponsor legislation to provide such a program for Federal employees, it need only amend 5 U.S.C., not the tax code. -80 OPM took no formal action at that time to initiate legislation to amend title 5. Subsequently, however, OPM did initiate a study of how cafeteria plans work in the private sector and in State governments. From this study, OPM may at some point be in a better position to judge what type of cafeteria plan, if any, might be appropriate to recommend for Federal employees. The Congressional Research Service also recently looked at the potential for cafeteria plans for Federal employees, and drew a favorable conclusion. It said "...these plans are regarded as important recruiting tools by large private employers. To remain a competitive employer, the Federal Government may wish to consider whether its benefit plans should be offered as part of a flexible benefits arrangement." -81 Independently from OPM, a task force organized by the President's Council on Management Improvement (the same group that initiated the flexiplace initiative) is currently reviewing Federal options regarding cafeteria benefit plans. According to the proposal for that study, "[t]he concept of 'choice' is increasingly important to the changing Federal workforce, and to those who must manage that workforce. Yet, that choice must be exercised consistent with broader cost control pressures." -82 When issued, this task force's report will obviously affect if, when, and how the Federal Government will offer a cafeteria benefits plan for its employees. If Federal personnel directors were making the decision, they would be in favor of the Government offering a cafeteria plan, as table 10 illustrates: Table 10 Number of agencies choosing the indicated response to: "To what extent do you believe that the Government's ability to attract and retain a quality workforce would be enhanced if the Government offered a cafeteria benefits plan to its employees (i.e., the opportunity to choose how the dollar value of their fringe benefits are allocated among a range of fringe benefit options)?" 3 To great extent 12 To a moderate extent 3 To a minor extent 0 To no extent 3 Don't know/Can't judge Note: One agency did not respond to this question Moreover, agencies would prefer quicker action from OPM to accomplish this goal. When we asked agencies how they would assess the pace at which OPM has approached cafeteria benefit proposals/ programs, of the 15 agencies which responded, 13 said OPM's pace was "Too slow." Policy Considerations of a Cafeteria Benefit Plan for Federal Employees In responding to the Board's questions about cafeteria benefit plans, OPM shared some of its concerns with us about this issue: Unlike the private sector, we must take into consideration the effect of cafeteria plans on general tax revenues and on medicare tax revenues (normally withheld from the employee's pay as a part of the FICA with-holding, but withheld as a distinct unit for most employees covered by the Civil Service Retirement System). Cafeteria plans are defined by the Federal tax code, and their distinguishing feature is that the employee's share of benefit costs is paid by salary reduction, which allows payment in pre-tax dollars, reducing both general and medicare tax revenues. In other words, the employee's savings in taxes results directly in a loss of general revenue receipts and a loss of receipts by the medicare trust fund. Private sector firms also save money because they pay less matching FICA tax. Therefore, they, too, save money at the expense of tax revenues. While the Board of Directors and stockholders of a company are likely to be pleased when money is saved by any means, it is not so clear that taxpayers would be happy for the Federal Government to make "savings" in this way. These issues must be carefully considered before OPM can consider recommending legislation to create cafeteria plans in the Federal Government. While OPM's response actually addresses the tax and revenue implications of flexible spending accounts and dependent care assistance programs, rather than cafeteria plans as such, its concerns are nevertheless clearly stated and to the point. The crux of OPM's argument has far-reaching implications for the formation of Government personnel management policy. The issue at hand can be framed in several different ways--is this a question of tax policy, for example, or of personnel policy, or perhaps of equity? OPM has apparently approached it as a tax question first, which, given the Government's fiscal difficulties, is certainly understandable. As a fiscally driven issue, it is not only reasonable but prudent to avoid instituting benefit programs like flexible spending accounts, since they would cost the Government tax revenue. On the other hand, flexible spending accounts are legal tax-saving tools, written directly into the Internal Revenue Code. They are potentially available to any American taxpayer whose employer sets up a qualifying plan. Nonfederal employers make their decisions about offering flexible spending accounts based on a variety of business judgments--will their computer system be able to handle the administrative aspects; is this something their employees want and need; would it enhance their ability to recruit and retain the employees they want? The question here is whether the Federal Government should apply the same or different criteria. There is also a legitimate question of equity at issue here--should Federal employees have access to the same rights and benefits as nonfederal employees? There certainly are precedents where Federal employees give up certain rights for the privilege of working for the Government (e.g., the right to strike, or to engage in partisan political activities). Should this same principle apply to employee benefits which have income tax consequences (and social security (FICA) tax consequences) as well? In this regard, it may be interesting to note a suggestion made by the Congressional Research Service (CRS) in its analysis of possible cafeteria benefit plans for Federal employees. Specifically, the CRS argued that, since adoption of a flexible spending account would occur under tax laws already on the books, the revenue losses resulting from such an action should not be counted in budget scorekeeping since they would not result from a change in Federal tax policy. -83 Whatever conclusion policymakers come to on the flexible spending account issue, it is important to also recognize that the question of cafeteria benefit plans is much broader than flexible spending accounts. It is quite possible for the Government to have a cafeteria plan and not offer a flexible spending account as a part of it, even though most cafeteria plans do offer these accounts. Accordingly, the question of whether to offer flexible spending accounts to Federal employees should not be allowed to overshadow the more important question of whether a cafeteria plan should be made available to Government workers. From our perspective, the work and family reasons for the Government to offer a cafeteria benefit plan to its employees are very persuasive. As discussed in the next chapter, the existence of a cafeteria plan could dissipate a whole range of potentially nettlesome equity issues which arise because some employees want or need various work and family benefit programs and others do not. In addition, the cost-containment aspects of these plans make them potentially attractive in times of fiscal restraint. Therefore, unless further study uncovers some major obstacle (e.g., a finding that the administrative or computer-related costs related to installing such plans are exorbitant), we recommend that OPM pursue whatever actions may be appropriate (including legislation where required), in order to implement a cafeteria benefit plan for Federal employees.