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Simple Cafeteria Plans - A GIFT for small employers.


Effective January 1, 2011, certain employers that establish “simple cafeteria plans” are exempt from the Code Section 125 nondiscrimination requirements as well as the non-discrimination requirements applicable to the plans offered through the cafeteria plan (e.g. Code Section 129 non-discrimination testing for dependent care FSAs, Code Section 105(h) non-discrimination testing for self-insured medical plans, etc).

The Act defines a simple cafeteria plan as a plan “which is established and maintained by an eligible employer,” and for which certain contribution, eligibility and participation requirements are met. In general, an eligible employer is an employer that employed an average of 100 or fewer employees for either of the prior two years.

Plans that qualify as a simple cafeteria plan for any given year are treated as meeting any applicable nondiscrimination requirements for that year (i.e., non-discrimination testing is not required for these plans).

Eligible Employer Definition
Under the Act, a small employer is any employer that had, on average, 100 or fewer employees on business days during either of the 2 preceding years.

If an employer was not in existence during the prior year, the number of employees is based on the average number of employees that is reasonably expected to be employed on business days during the current year.

The Act contains a provision for growing businesses that allows employers who offer a simple cafeteria plan in a qualifying year and then subsequently grow beyond 100 employees to maintain that plan in subsequent years.

A growing employer may continue the simple cafeteria plan until the employer exceeds an average of 200 or more employees during a preceding year.

Eligibility, Participation, and Contribution Requirements
To establish and maintain a simple cafeteria plan, an eligible small employer must design their plan to meet the following requirements:

  • All employees with at least 1,000 hours of service during the preceding plan year must be eligible to participate in the plan (other than employees that may be excluded, as outlined below)
  • Each employee that is eligible to participate in the plan must have the right, subject to terms and conditions applicable to all participants, to elect any benefit available under the plan

Allowable Exclusions
The Act allows employers to exclude the following employees from participating in the plan:

  • Employees who have not attained the age of 21 before the close of the plan year
  • Employees who have less than one year of service with the employer as of any day during the plan year
  • Employees covered under a collective bargaining agreement if there is evidence that the benefits covered under the plan were the subject of good faith bargaining between employee representatives and the employer.
  • Employees described in Code Section 410(b) (3)(c) (relating to non-resident aliens working outside the United States)

Contribution Requirements
The employer must make a contribution to provide qualified benefits under the plan on behalf of each qualified employee, regardless of whether the employee makes a contribution of their own. This contribution amount must be in an amount equal to:

  1. A uniform percentage (not less than 2 percent) of the employee’s compensation for the plan year, or — An amount which is not less than the lesser of:
  1. 6 percent of the employee’s compensation for the plan year, or;
  1. Twice the amount of the salary reduction contributions of each qualified employee

Section 125(j)(3)(C) allows comparable contributions for HCEs and key employees, as it provides:

Subject to subparagraph (B)(regarding matching contributions), nothing in this

paragraph shall be treated as prohibiting an employer from making contributions to provide qualified benefits under the plan in addition to contributions required under subparagraph (A).

The required contributions in (A) are for “qualified employees” but the employer contributions for at least 2% of pay are for all employees under (A)(i), not just qualified employees, and (B) indicates that matching contributions can be made for HCEs and key employees.

The rate of matching contributions made by the employer on behalf of highly compensated or key employees cannot be greater than the rate of matching contributions for non-highly compensated or key employees.

Qualified, Highly Compensated, and Key
Employees Defined

For the purposes of the Act, a qualified employee is any employee that is eligible to participate in the cafeteria plan and is not a highly compensated or key employee.

The term “highly compensated employee” is defined in Code Section 414(q). The income limitation for highly compensated employees is adjusted from time to time and is currently set at $110,000.

The term “key employee” is defined in Code Section 416(i).

For 2010, an individual is an HCE if his or her compensation from the same employer in 2009 exceeded $110,000 or the person is an officer, more than 5% owner, a spouse or dependent working for the same employer.

For 2010, an individual is a key employee if:

  • An officer earning more than $160,000 in the 2009 plan year; or
  • A more than a 5% owner; or
  • A more than a 1% owner receiving compensation in excess of $150,000 in the prior plan year.
  • Government entities do not have Key Employees.

The Benefits of Establishing a Simple Cafeteria Plan
Under the Act, simple cafeteria plans are exempt from the Code Section 125 nondiscrimination requirements as well as the nondiscrimination requirements applicable to the plans offered through the cafeteria plan (e.g. Code Section 129 non-discrimination testing for dependent care FSAs, Code Section 105(h) nondiscrimination testing for self-insured medical plans, etc).

Because the sponsor of a simple cafeteria plan is not required to perform nondiscrimination testing, the administrative burden of offering the plan is lessened; making it easier for small employers to offer a plan to their employees.

In addition, because C Corporation owner employees or other Key Employees can participate without limitation, Simple Cafeteria Plans present a new opportunity to  a large market segment that has previously been restricted by the non discrimination requirements.

For more information or a proposal call Rich Sormanti, Sales and Marketing Director at 800-499-3539 ext. 233, rsormanti@amben.com

American Benefits Group will continue to keep you apprised of breaking news and developments.

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