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Cafeteria Style – Buffets

A cafeteria plan, also called a flexible benefit plan, allows employees to choose from a menu of optional benefits the ones that best fit their individual needs.

A cafeteria plan gets its name from a cafeteria, where individuals select their food of choice, employees may choose benefits of their choice before taxes are calculated. These plans become more useful as diversity within workforce’s continues to grow and employees seek personalized benefits.

Cafeteria plan selections include insurance options, such as contributions to health savings accounts, or group term life insurance and disability insurance. Other popular selections include retirement plan contributions, adoption assistance plans, flexible spending accounts and cash benefits. Flexible plan selections allow employees to tailor a cafeteria plan to their specific needs. For example, the best selection for an employee reaching retirement might be to make contributions to his or her 401(k) plan, while an employee with a large family may be better suited to a health plan that has broad coverage.

One condition for markets for goods and services to achieve efficient production and consumption is that prices reflect resource use. At a food buffet consumers pay to get access to a flow of a variety of foods at a fixed cost. The buyer of health insurance gets access to a flow of medical services at no or little extra cost as long as no rationing takes place. In both cases there are incentives for over-consumption of the services and there are no incentives to be economical in choice of food at the buffet and of medical procedures in healthcare. There are even more serious problems, however, that can make the markets for buffets and insurance collapse.

The provider of the buffet sets a price based on the average guest’s expected intake. The buffet will attract those with above average appetite and those with taste for the relatively expensive dishes. To cover costs the provider finds that the price must be increased or costs must be reduced by lowering the quality of food. At the new price the same process will repeat itself. The average buffet consumer becomes increasingly voracious at increasing prices and decreasing quality. In the end only the extreme gluttons will be willing to pay for the buffet.