Is a Simple Cafeteria Plan Right for You?
This is part of our series of alerts intended to help guide employers and plan sponsors through their new obligations under the health care reform laws and related guidance.
You may have heard that you can establish a new type of cafeteria plan called a “Simple Cafeteria Plan.” This new type of cafeteria plan was established by health care reform and is available for years beginning after December 31, 2010. It provides eligible employers an automatic “pass” for many of the nondiscrimination tests that apply to cafeteria plans and their component benefits. This alert will focus on whether a Simple Cafeteria Plan might be right for you.
1. Can I Sponsor a Simple Cafeteria Plan?
To establish a Simple Cafeteria Plan, you must have employed an average of 100 or fewer employees (including leased employees) during either of the two preceding plan years. If you hire more employees after establishing a Simple Cafeteria Plan, a special rule allows you to continue to sponsor your Simple Cafeteria Plan until the year following the first plan year in which you employ an average of 200 or more employees. If you are a new employer that was not in existence throughout the preceding year, you should base your eligibility determination on the average number of employees that you reasonably expect to employ on business days during the current year.
In making this determination, special aggregation rules require you to include the employees of your predecessors and any member of your controlled group. For this purpose, a controlled group includes a parent-subsidiary and brother-sister relationships. It is important to note that a 50% threshold is used in each case when determining whether there is a controlled group. If you wish to establish a Simple Cafeteria Plan, you must first ensure that the employees of your affiliates are either excluded or do not cause you to exceed the threshold.
2. What Nondiscrimination Tests Are Satisfied?
Nondiscrimination rules are generally designed to prevent cafeteria plans from discriminating in favor of individuals who are either highly compensated or otherwise key to the business. The nondiscrimination tests for cafeteria plans and their component benefits are extensive and complicated. For example, a common cafeteria plan that provides pre-tax salary reductions for medical premiums, a health flexible spending account (a “health FSA”) and a dependent care assistance program (“DCAP”) must pass nine separate tests. Many of the rules for these tests are included in proposed regulations that are, in some cases, ambiguous and even inconsistent with the statute and other regulations. Compliance can be burdensome and expensive.
A Simple Cafeteria Plan is treated as automatically satisfying the three nondiscrimination requirements that apply to cafeteria plans: the eligibility test, the contribution and benefits test, and the key employee concentration test. Additionally, the following nondiscrimination tests for certain component benefits under the cafeteria plan are treated as having been satisfied: (i) the eligibility and benefits test for self-insured medical reimbursement plans, including health FSAs; (ii) the eligibility test, the contribution and benefits test, the more-than-5% owners concentration test, and the 55% average benefits test for DCAPs; and (iii) the eligibility and benefits test for group term life insurance. This safe harbor does not extend to the nondiscrimination requirements that apply to an adoption assistance program offered under your cafeteria plan.
It is important to note that health care reform also added certain nondiscrimination requirements for your fully-insured plans. At this time, these rules are suspended and will not apply until the federal government issues regulations. It is unclear whether a Simple Cafeteria Plan will automatically satisfy these new requirements.
3. What Are the Requirements of a Simple Cafeteria Plan?
You must offer a Simple Cafeteria Plan to all employees with at least 1,000 hours of service during the preceding plan year. You may exclude employees who have not attained age 21, employees with less than a year of service, employees covered by a collective bargaining agreement (union), and certain nonresident aliens working outside the United States. The general rules for cafeteria plan eligibility apply, so self-employed individuals, partners in a partnership (this includes members in an LLC taxed as a partnership) and more-than-2% S-corporation shareholders may not participate.
You must make minimum contributions to employees participating in the Simple Cafeteria Plan who are not “key employees” or “highly compensated employees” (generally, officers or employees that are paid compensation in the current or prior year over a specified dollar threshold ($110,000 in 2011; $115,000 in 2012) or owners). Your minimum contributions must be at least:
- a uniform percentage (but not less than 2%) of the employee’s compensation for the plan year, or
- an amount that equals or exceeds the lesser of:
- 6% of the employee’s compensation for the plan year, or
- twice the employee’s salary reductions (i.e., amounts contributed to the cafeteria plan at the election of the employee on a pre-tax basis).
You may make contributions exceeding these required minimums. However, if you satisfy the minimum contribution requirement by making matching contributions, it cannot make matching contributions on behalf of “key employees” or “highly compensated employees” at a rate that is greater than the matching contribution rate for any other employee.
If you qualify to sponsor it, a Simple Cafeteria Plan can provide cost savings and avoid the burden of annually testing your cafeteria plan and many of its benefit options. It may be especially helpful if you have had difficulty passing some of the nondiscrimination tests due to the makeup of your employee population (e.g., large percentage of key or highly compensated employees). In the past, you may have been forced to exclude “key employees” or “highly compensated employees” from benefit options, limit their benefits or limit their ability to pay for benefits on a pre-tax basis. A Simple Cafeteria Plan may also allow you to provide certain otherwise discriminatory benefits to “key employees” and “highly compensated employees” while allowing other employees to enjoy the benefits of a cafeteria plan.Print PDF