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

A “simple cafeteria plan” means a cafeteria plan that is established and maintained by an eligible employer and with respect to which contribution, eligibility, and participation requirements are met.¹

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

“Eligible employer” means, with respect to any year, any employer that employed an average of 100 or fewer employees on business days during either of the two preceding years.⁷ An employer that initially qualifies for a simple cafeteria plan ceases to qualify in the year after the number of employees reaches 200.⁸

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Planning Point: If the employer’s business was not in existence throughout the preceding year, it is eligible to establish a simple cafeteria plan if the employer reasonably expects to employ an average of 100 or fewer employees in the current year. If the employer establishes a simple cafeteria plan in a year it employs an average of 100 or fewer employees, it is considered an eligible employer for any subsequent year as long as the employer does not employ an average of 200 or more employees in a subsequent year.

A qualified employee is any employee who is eligible to participate in the cafeteria plan and who is not a highly compensated or key employee.⁹

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