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Simple Cafeteria Plans

Benefits of a Simple Cafeteria Plan

The Affordable Care Act amended the Internal Revenue Code and added regulations for the Simple Cafeteria Plan. This is a great opportunity for small businesses (fewer than 100 employees) to offer some sort of healthcare coverage to their employees. The major benefits of a Simple Cafeteria Plan are the ease of implementation, and the safe harbor granted from the nondiscrimination testing of the Internal Revenue Code. This is a great plan for a small company which has had trouble with nondiscrimination testing in the past and still wants to offer coverage to their employees. Simple Cafeteria Plans will be treated as meeting the nondiscrimination requirements of all of the following tests under the Code:

  • eligibility testing
  • benefits testing
  • contributions and benefits testing
  • 25% key employee concentration testing
  • 5% owners concentration testing
  • 55% average benefits testing

Employers that wish to set up and operate a Simple Cafeteria Plan must do the following:

  • Meet employer eligibility requirements
  • Make certain contribution requirements, and
  • Meet certain employee participation requirements in the plan

Employer Eligibility

To be an eligible employer that can establish a Simple Cafeteria Plan, you must have employed an average of 100 or fewer employees in either of the two preceding plan years.

Contribution Requirements

Employers that sponsor Simple Cafeteria Plans are required to make certain contributions under the plan on behalf of qualified employees. Qualified employees are employees who are not highly compensated employees or key employees, as defined by the Internal Revenue Code. The required contributions must be made for each qualified employee regardless of whether they make any salary reduction contributions under the plan themselves. This means that the contribution must be a true employer contribution, made in addition to any salary reduction contributions taken by the employees themselves. There is one exception to that rule: if an employer uses a matching contribution method, then no contribution needs to be made unless the employee has made a salary reduction contribution.

Under the Simple Cafeteria Plan contribution rules, the employer must contribute an amount equal to either:

  • A uniform percentage, not less than 2% of the employee’s compensation for the plan year (nonelective contribution method); or
  • An amount that equals or exceeds the lesser of (a) 6% of the employee’s compensation for the year, or (b) twice the employee’s salary reduction contributions (matching contribution method)

Employers are permitted to make greater contributions than required by the two methods. Employers can choose between the two methods; however, they must use the same method for all qualified employees.

Employee Participation Eligibility

Simple Cafeteria Plans must comply with eligibility and participation regulations in the Internal Revenue Code. The general rule is that all employees with at least 1,000 hours of services during the preceding year must be eligible to participate in the Simple Cafeteria Plan. The Code excludes the following employees from participation in the plan:

  • self-employed individuals
  • partners of a partnership,
  • 2% or greater shareholders of an S corp

The Code explains that there are certain employees that the employer* may choose to exclude*. Employers can exclude the following categories of employees:

  • employees who have not turned 21 years old before the close of the plan year;
  • employees who have less than one year of service with the employer;
  • employees covered by a collective bargaining agreement, if there is evidence that the benefits covered under the cafeteria plan were the subject of good faith bargaining between employee representatives and the employer; or
  • certain nonresident aliens working outside the U.S.

Pre-Tax Contributions through the Exchanges

Starting in 2014, small businesses can set up these Simple Cafeteria Plans through the exchanges. Then the employer makes their contribution, and allows their employees to choose different benefits options through the exchange while still retaining the benefit of pre-tax contributions. This is another great opportunity for eligible employers created by healthcare reform.

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