3505 / What are the rules that apply to simple cafeteria plans for small businesses?

The Affordable Care Act of 2010 (ACA) provides a safe harbor “simple cafeteria plan” under which an “eligible employer” (generally an employer with fewer than 100 employees) is treated as meeting any applicable nondiscrimination requirements for the year.²

The employer is required to make contributions on behalf of each “qualified employee” in an amount equal to the following: (1) a uniform percentage (not less than 2 percent) of the employee’s compensation; or (2) an amount not less than the lesser of (x) 6 percent of the employee’s compensation for the plan year, or (y) twice the amount of salary deduction contributions of each qualified employee.³ Contribution requirement option (2) is not met if the rate of contributions with respect to the salary contributions of any highly compensated or key employee at any rate of contribution is greater than that with respect to an employee who is not a highly compensated or key employee.⁴

All employees with at least 1,000 hours of service during the preceding plan year must be eligible to participate. Each employee who is eligible to participate must be able to select any benefit available under the plan.⁵ An employee can be excluded if the employee:

(1) is under age 21;

(2) has less than one year of service;

(3) is covered by a collective bargaining agreement and the benefits of a cafeteria plan were the subject of good faith bargaining; or

(4) is a nonresident alien working outside of the United States.⁶