Small employers (average of 100 or fewer employees on business days during either of the two preceding years) may provide employees with a “simple cafeteria plan.” Under such a plan, the employer is provided with a safe harbor from the nondiscrimination requirements for cafeteria plans as well as from the nondiscrimination requirements for specified qualified benefits offered under a cafeteria plan–
o including group term life insurance,
o benefits under a self-insured medical expense reimbursement plan, and
o benefits under a dependent care assistance program.
Note: Once the Simple Cafeteria plans have been established, the employer is deemed as having met the small employer requirement until such time as the average number of employees exceeds 200 on business days during any year proceeding any such subsequent year.
Simple Cafeteria Plan – For purposes of the provision, a simple cafeteria plan is a plan that:
(1) is established and maintained by an eligible employer,
(2) meets prescribed contribution requirements, and
(3) meets prescribed eligibility and participation requirements.
Contribution Requirements – To create a simple cafeteria plan, the employer will have to make contributions to provide qualified benefits under the plan on behalf of each qualified employee (without regard to whether a qualified employee makes any salary reduction contribution) in an amount equal to:
(1) a uniform percentage (not less than 2%) of the employee’s compensation for the plan year, or
(2) an amount which is not less than the lesser of
(a) 6% of the employee’s compensation for the plan year, or
(b) twice the amount of the salary reduction contributions of each qualified employee.
The requirements of (2) above are not met if, under the plan, the rate of contributions with respect to any salary reduction contribution of a 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.
Qualified Employee – Does not include highly compensated or key employees.
Highly-Compensated Employee – Is any employee who:
(1) was a five percent owner at any time during the year or the preceding year or,
(2) for the preceding year, received compensation from the employer in excess of the inflation adjusted compensation amount of $80,000 ($120,000 for 2015), and, if the employer elects, was in the top-paid group of employees for the preceding year. The employer can make the election annually, without the consent of IRS. An employee is in the top-paid group of employees for any year if such employee is in the group consisting of the top 20 percent of the employees when ranked on the basis of compensation paid during such year.
Key Employee – In general, the term “key employee” (Sec 416(i)) for 2015 (call for other years) means an employee who, at any time during the plan year, is an officer of the employer having an annual compensation greater than $170,000 or a 5-percent owner of the employer, or a 1-percent owner of the employer having an annual compensation from the employer of more than $150,000.
Minimum Eligibility & Participation Requirements – The minimum eligibility and participation requirements will be met with respect to any year if, under the plan,
(a) all employees who have at least 1,000 hours of service for the preceding plan year are eligible to participate, and
(b) each employee eligible to participate in the plan may, subject to terms and conditions applicable to all participants, elect any benefit available under the plan.
However, an employer will be able to elect to exclude under the plan, employees:
(1) who have not attained the age of 21 before the close of a plan year (plan may provide for a younger age),
(2) who have less than one year of service with the employer as of any day during the plan year (plan may provide for a shorter period of service),
(3) who are covered under an agreement which the Secretary of Labor finds to be a collective bargaining agreement, if there is evidence that the benefits covered under the cafeteria plan were the subject of good faith bargaining between employee representatives and the employer, or
(4) who are described in Code Sec. 410(b)(3)(C) (relating to nonresident aliens working outside the U.S.)
If you would like to explore the benefits of setting up a simple cafeteria plan for your company, please give this office a call.