Simple Cafeteria Plans for Small Businesses


A cafeteria plan can enable employees of a business to choose from an array of benefits and, potentially, to customize a benefits package that is based on their individual needs. However, cafeteria plans are subject to a number of nondiscrimination rules, and separate nondiscrimination rules may apply to the individual benefits offered through a cafeteria plan as well. These nondiscrimination rules are generally difficult for small businesses to satisfy; that’s because in companies with few employees, it’s much more likely that benefits paid to highly compensated and key employees will be too high as a percentage of total benefits paid. As a result, there has historically been little incentive for small businesses to set up cafeteria plans for their employees.

Health-care reform legislation signed into law in 2010 (the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act of 2010) established the “simple cafeteria plan” for small businesses beginning in 2011. An eligible small employer who establishes and maintains a simple cafeteria plan will be treated as automatically meeting the nondiscrimination rules that would otherwise apply if the plan satisfies minimum eligibility, participation, and contribution requirements. If all conditions are met under this safe harbor, not only are the nondiscrimination rules related to the cafeteria plan itself considered satisfied, but also the separate nondiscrimination rules that apply for individual qualified benefits available under the plan including group term life insurance, group health insurance, and benefits under a dependent care assistance program.

Eligible employers

To be eligible for the safe harbor provision, a business cannot have employed an average of more than 100 employees on business days during either of the two preceding years. If an eligible employer establishes a simple cafeteria plan for employees, and maintains the plan without interruption, the employer will continue to qualify for the simple cafeteria plan until the employer employs an average of 200 or more employees on business days in a preceding year.

Caution: For purposes of determining employer eligibility, a year may only be taken into account if the employer was in existence throughout the year. If an employer was not in existence throughout the preceding year, the determination is based on the average number of employees that the employer reasonably expects to be employed on business days in the current year.

Employee eligibility requirements

All employees (including the small business owners themselves) generally must be eligible to participate in the cafeteria plan, and each eligible employee must be able to elect any benefit available under the plan (subject to the terms and conditions that apply to all participants).

A plan can exclude:

  • Employees who have not attained the age of 21 (or a younger age provided in the plan) before the close of a plan year,*
  • Employees who have fewer than 1,000 hours of service for the previous plan year,*
  • Employees who have not completed one year of service with the employer as of any day during the plan year,
  • Employees who are covered under a collective bargaining agreement if the benefits covered under the cafeteria plan were the subject of good faith bargaining between employee representatives and the employer, or
  • Employees described in IRC Section 410(b)(3)(C) relating to nonresident aliens working outside the United States.

*An employer may select a younger age and shorter service requirement, but only if such younger age or shorter service requirement applies to all employees.

Minimum contribution requirement

The employer must provide a minimum contribution for each employee that can be applied toward the cost of any qualified benefit (other than a taxable benefit) offered under the plan. There are two methods to meet the minimum contribution requirement:

  1. Nonelective contribution method: An amount equal to at least 2 percent (a uniform percentage must be used) of each employee’s compensation for the plan year, determined without regard to whether an employee makes a salary reduction contribution under the cafeteria plan.
  2. Minimum matching contribution: The lesser of (1) 200 percent of the amount an employee elects to contribute via salary reduction for the plan year or (2) 6 percent of the employee’s compensation for the plan year.

Tip: A simple cafeteria plan is permitted to provide for matching contributions in addition to the minimum required but only if matching contributions with respect to salary reduction contributions for any highly compensated employee or key employee are not made at a greater rate than the matching contributions for any non highly compensated employee.

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