Cafeteria plans are designed to allow nontaxable benefits to employees.  These benefits include certain medical coverage, group-term life insurance, flexible spending accounts and dependent care assistance.  Having a cafeteria plan in place can be an added bonus to employers for finding and keeping quality employees.  However, many small businesses have shied away from adopting a cafeteria plan due to the burdens of dealing with the nondiscrimination requirements. 

The HealthCare Legislation passed in 2010 introduces a new type of cafeteria plan for small businesses.  Starting on January 1, 2011, small businesses can adopt what is known as a “Simple Cafeteria Plan”.  A simple cafeteria plan provides a safe harbor from nondiscrimination requirements for cafeteria plans.  If the safe harbor tests are met, the nondiscrimination requirements are deemed to be met as well.

What are Safe Harbor Tests?

  1. The plan must be established and maintained by an eligible employer.
  2. Certain contribution requirements must be met.
  3. Certain eligibility and participation requirements must be met.

Who is Eligible?

An eligible employer is one with an average of 100 or fewer employees during either of the two preceding years.

What are the Contribution Requirements?

For all non-highly compensated employees and non-key employees, an employer must make a contribution on behalf of each qualified employee in an amount equal to:

  1. A % of the employee’s compensation, not less than 2%; or
  2. A contribution not less than the lesser of

a.  6% of the employees compensation; or

b.  Twice the amount of the salary reductions made by each qualifying employee

What are the Participation Requirements?

The participation requirements will be met if an eligible employer allows all employees who had at least 1,000 hours of service in the preceding year and allows all eligible employees to elect any benefit available under the plan.  However, an employer can exclude those who are not 21 years old by the end of the plan year and those individuals with less than one year of service during the plan year.