One of the main advantages of a cafeteria plan is that you can offer a more attractive salary package to your employees, but without additional costs. Budget neutrality is essential for most employers. For KPMG, this is one of the main concerns when implementing a cafeteria plan for a client. In this third contribution to our cafeteria plan series, we would like to provide more details about budget neutrality.

Budget neutrality: the basis

In a nutshell, budget neutrality means that an employee's choice in a cafeteria plan does not result in an additional cost for the employer. An employee who, for example, exchanges a part of the end-of-year bonus for a leased bicycle will - if everything is set up properly - make a budget-neutral choice.  This is first and foremost important for the employee, who can be sure that their choice in the plan is neutral. In other words, they can be sure that their employer is not making savings through the cafeteria plan. Moreover, the employee usually always benefits from the cafeteria plan choice and does not lose out. It is also important for the employer that this choice does not increase the total salary cost. 

Which budget neutrality?

Budget neutrality can have different meanings. In the strictest sense, budget neutrality means that the wage cost remains the same. The cost of the budget that is exchanged is equal to the cost of the new benefit.

However, budget neutrality can also be viewed in a broader sense. Usually, a flexible compensation or mobility plan is accompanied by some costs. These can be direct or indirect costs. A direct cost includes, for example, the cost of a supplier, the subscription cost of the mobility app, or the licence cost of the cafeteria plan tool. An indirect cost, which is more difficult to quantify, is for example the additional staff cost for cafeteria plan management. You also need to account for possible future costs to cover certain risks, such as costs in the event of redundancy or higher taxes in new legislation.

Which elements are the most important to consider?

With budget neutrality in the strict sense, it is obviously important to account for all costs that can be linked to benefits. In practice, however, we notice that this does not always happen or happens in the wrong way. For example, one should also consider social security, corporation tax, VAT and special contributions, which may or may not be due on a particular payroll benefit.  For a company car, for example, we recommend starting from the Total Cost of Ownership (TCO). However, we still often notice that the TCO is not properly determined in many cases.

In addition, it is important to think of some other snags. For example, if as an employer you benefit from the reduced withholding tax on research and development for certain employees, this does have a major impact on costs and should therefore be included in the analysis. 

How can the other costs be absorbed?

In general, there are two ways to cover the costs.

On the one hand, as an employer, you can decide which part of the employer contributions - normally due on the budget that the employee hands in - is added to the employee's budget. For example, if the end-of-year bonus is EUR 2,500, the effective employer contribution that would have been owed is approximately EUR 627 (27%).  If it is decided that the employee is entitled to 20% of the contributions, the total budget of the employee is thus 3,000 EUR (2,500 EUR gross and 500 EUR of the saved employer contributions). An amount of 175 EUR (7%) can then be used to cover certain costs and remain budget-neutral in the broad sense.

On the other hand, one can also work with administrative costs, which can be charged per benefit and where differentiation is possible. For example, one can decide to charge EUR 2 extra per month for the ambulant insurance, while no administration cost is charged for the leased bicycle. In this way, you not only work on budget neutrality, but you can also stimulate certain benefits according to your HR strategy. 

Is budget neutrality always necessary?

Firstly, it is always possible to add an additional budget to the cafeteria plan. In this case, of course, there is no question of budget neutrality.  If, for example, a company wishes to offer a referral bonus and does so via the cafeteria plan, this will obviously result in an additional cost.  But even then, it is important to look closely at the cost of the benefit, so that there is no difference in function of cost between different benefits.

It is also not always possible to quantify budget neutrality. A choice for additional holidays may be budget-neutral in terms of figures, but it can still become an additional cost for the company if no production takes place on that day. On the other hand, the value of a cafeteria plan or flexible mobility is also difficult to quantify. The appreciation of the salary package and the satisfaction of the employee increase and that is worth gold anyway.