Simple Cafeteria Plans - Good News for Smaller Companies

One of the real gems in the sometimes confusing and restrictive Health Reform Act is the introduction of “Simple Cafeteria Plans”. Highly Compensated Employees (HCEs) in smaller companies (less than 100 employees) have long been hampered by some very restrictive limits on Cafeteria Plan benefits. Simple Cafeteria Plans remove these restrictions.

Nondiscrimination requirements:

Cafeteria plans and certain qualified benefits (including group term life insurance, self insured medical reimbursement plans, and dependent care assistance programs) are subject to nondiscrimination requirements to prevent discrimination in favor of highly compensated individuals generally as to eligibility for benefits and actual contributions and benefits provided. There are also rules to prevent the provision of disproportionate benefits to key employees through a cafeteria plan. Although the basic purpose of each of the nondiscrimination rules is the same, the specific rules for satisfying the relevant nondiscrimination requirements, including the definition of highly compensated individual, vary for cafeteria plans generally and for each qualified benefit. An employer maintaining a cafeteria plan in which any highly compensated individual takes part must make sure that both the cafeteria plan and each qualified benefit satisfies the relevant nondiscrimination requirements. Otherwise, a failure to satisfy the nondiscrimination rules generally results in a loss of the tax exclusion by the highly compensated individuals.

Effective January 1, 2011, an eligible small employer is provided under the new health reform law with a safe harbor from the nondiscrimination requirements for cafeteria plans as well as from the nondiscrimination requirements for specified qualified benefits offered under a cafeteria plan, including group term life insurance, benefits under a self insured medical expense reimbursement plan, and benefits under a dependent care assistance program. Under the safe harbor, a cafeteria plan and the specified qualified benefits are treated as meeting the specified nondiscrimination rules if the cafeteria plan satisfies minimum eligibility and participation requirements and minimum contribution requirements.

Requirements to qualify are as follows:

• An employer is eligible if, during either of the preceding two years, the business employed 100 or fewer employees on average (based on business days). For a new business, eligibility is based on the number of employees the business is reasonably expected to employ. Businesses can grow to 200 employees once qualified.
• The usual aggregation rules apply that add together all employees of commonly owned businesses.
• Some employees may be excluded in determining the count of eligible employees; i.e. have not attained age 21, less than one year of service, covered under a collective bargaining agreement, and non-resident aliens.

Minimum Contribution Requirements:

The employer contribution requirement can be met with a non-elective employer contribution or a minimum matching contribution.
• The minimum non-elective contribution is an amount equal to a uniform percentage (not less than 2%) of each eligible employee’s compensation for the year, determined without regard to whether the employee makes any salary reduction contribution under the Cafeteria Plan.
• The minimum matching contribution is the lesser of 100% of the amount of the salary reduction contribution elected to be made by the employee for the plan year or six percent of the employee’s compensation for the plan year. Compensation for purposes of this minimum contribution requirement is compensation with the meaning of section 414(s).