460 / What is a simple cafeteria plan?

The ACA created simple cafeteria plans for small businesses, meaning those with average employment of 100 or fewer employees, effective for years beginning in 2011 and thereafter. The concept is similar to 401(k) retirement plan safe harbors, SIMPLE 401(k)s, and SIMPLE-IRAs.

Employer and employee contributions are deductible, not subject to Social Security tax, and not taxable income to participants. Thus, available benefits can be purchased with pre-tax dollars. Available benefits include health and dental insurance, reimbursement for health and dental expenses not covered by insurance, dependent care, group term life insurance, health savings accounts, and disability insurance.

Simple cafeteria plans automatically satisfy the nondiscrimination requirements of IRC Section 125(b), the 25 percent concentration test, and nondiscrimination requirements of IRC Sections 79(d), 105(h), and 129(d) applicable to group term life insurance, self-insured health benefits (medical reimbursement), and dependent care assistance benefits (child care), respectively.

Through an apparent oversight, IRC Section 125(j) does not provide an express exception for the health insurance nondiscrimination rules of IRC Section 9815. It is likely that if the same insurance options are available to all participants, regardless of their use, the health insurance nondiscrimination rules will be met.

Where a business wants to avoid the 25 percent concentration test and contribute for owner-employees, only a regular C corporation can do so because owner-employees are only employees for income tax purposes in this context. Sole proprietors, 2 percent or more
S corporation shareholders, and partners, including members of LLCs taxed as partnerships, are not employees for income tax purposes. Instead, they are treated as self-employed individuals.