Simple cafeteria plans for small businesses

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SIMPLE Cafeteria Plan

Under the new Healthcare Reform package, and effective for taxable years beginning after December 31, 2010, small employers are now allowed to adopt new SIMPLE Cafeteria Plans. Under the new law, SIMPLE Cafeteria Plans will be deemed to meet nondiscrimination requirements as long as the plan sponsor meets certain eligibility, participation, and minimum contribution requirements. This “safe harbor” would also cover the non-discrimination requirements applicable to certain benefits offered under a cafeteria plan, including group life insurance, coverage under a self-insured group health plan, and benefits under a dependent care assistance program.

A Cafeteria Plan (as provided for under Internal Revenue Code Section 125) is an employer sponsored plan under which employees have the option of selecting benefits or cash. Employees can choose which tax free benefits fit their needs, or may instead elect to receive taxable cash payments in lieu of unselected benefits. For example, under a Cafeteria Plan, employees may use salary reduction to pay their share of premiums for health insurance provided by their employer, with these payments made on a pre-tax basis. Thus, a Cafeteria Plan provides tax savings to employee and employer alike by subtracting premiums from gross salary before federal income and Social Security taxes are calculated.

A Cafeteria Plan must be established in writing; it may not discriminate in favor of highly compensated participants and it may not favor key employees. In the past, these non-discrimination rules have discouraged small business owners from using Cafeteria Plans. Further, if the non-discrimination rules are violated the plan benefits provided to highly compensated or key employees must be taxed. Because of the potential for taxation of benefits provided by the plan, small employers—who may be more likely than larger employers to have a higher percentage of highly compensated employers—have tended not to provide Cafeteria Plans to their employees.

In sum, besides easing the administrative burden once faced by small businesses that sponsored a Cafeteria Plan, the Healthcare Reform package also provides a safe harbor to the discrimination requirements applicable to highly compensated and key employees.

Who qualifies for a SIMPLE Cafeteria Plan?

A small employer is defined as one with an average of 100 or fewer employees on business days during either of the two preceding years. If the employer was not in existence during the prior year, the determination is based on the average number of employees who are reasonably expected to be employed on business days during the current year.

Once the plan is established, the company will be deemed to meet the requirement even if it grows to employ more than 100 people in subsequent years; this window has been established to encourage employers to continue hiring. Finally, once employees number 200 or more, the business no longer qualifies for a SIMPLE Cafeteria Plan.


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BiblioGov To amend the Internal Revenue Code of 1986 to allow small businesses to set up simple cafeteria plans to provide nontaxable employee benefits to their ... cafeteria plans, flexible spending accounts.
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2012-08-29 11:33:36 by L1432

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