Small business cafeteria plan
Resources » benefits plans » simple cafeteria cafeteria 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. 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. 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. 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 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 qualifies for a simple cafeteria plan? 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 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. Simple cafeteria plan allows employees to use pretax funds to pay their portion of the health, vision, dental, and other employer-sponsored welfare premiums. The employer contribution must (a) equal a uniform percentage (not less than 2 percent) of the employee’s compensation for the plan year, or (b) equal a 200% match of the employee contributions up to 6% of the employee’s compensation for the plan year. Order to meet nondiscrimination requirements, all non-excludable employees with at least 1,000 hours of service during the preceding plan year must be eligible to participate in a simple cafeteria employer may elect to exclude employees who have not attained age 21 before the end of the plan year, have less than one year of service as of any day during the plan year, are covered under a collective bargaining agreement, or are nonresident aliens. Plan may provide for a shorter period of service requirement for employees who are younger, if desired. Each eligible employee must be able to elect any benefit available under the plan under the same terms and conditions as those applied to all other an employer offers such a plan, the plan is deemed to pass discrimination testing. In discrimination testing, highly paid executives and other key employees’ (as defined by regulations) benefits in the plan are compared to benefits provided to other employees who are contributing to the plan. If the plan does not pass certain threshold tests and therefore fails the test, benefits are refunded as necessary to the highly compensated employees and become taxable to companies with a greater number of higher-level employees, such as a physicians’ practice or a law firm, making the commitment to a simple cafeteria plan can allow key employees and executives to maximize their benefits by freeing them from discrimination r incentive to employers is the savings on payroll taxes. In addition, because the irs may provide its own checklist in order to implement these plans, employers will save on plan document costs as ipation requires that employers make a minimum employer contribution, which means putting more dollars into the plan. With executives or key employees and discrimination testing issues, this slight drawback to the plan may be worth the changes have occurred in flexible spending accounts? Further, the employer is responsible for compliance with these rules, which includes maintaining adequate beginning in 2011, the penalties have increased from 10 percent to 20 percent if funds from a health saving’s account are used for nonmedical expenses before age beginning in 2013, the maximum reimbursement amount will be limited to $2,500 for fsas as part of a section 125 plan. By imposing a $2,500 cap, the plan generates the after-tax revenue while also presenting an opportunity for a cost savings to the employers navigate a simple cafeteria plan on their own? While eligible small employers should explore a simple cafeteria plan, navigating these complex plans is best done with professional guidance. Employers without the services of a third-party administrator should consult with an attorney or certified public accountant (cpa) to help ensure that they are in compliance with the rules and understand the tax excellent benefits delivery tool, a simple cafeteria plan helps employers provide tax free benefits to employees. The new healthcare reform legislation did not change current law, in which sole proprietors, members of limited liability companies (llcs), partners in a partnership, and more than two percent shareholders of s corporations are precluded from participating in a cafeteria plan. These restrictions will continue to be a major impediment to small business use of cafeteria - section 125 - flexible spending accounts |. Small business and the cafeteria health care situation in our country presents problems for employees of small businesses. Many small businesses simply cannot provide any health insurance coverage for their employees; others are only able to pay a portion of the premiums. As in past years, health insurance premiums continue to rise for small business; increases in premiums for small businesses this year are often in the 15% to 25% range. Many small businesses survive on the margin and are careful to provide only those employee benefits that the company can afford. Because of the increasingly high cost of benefits, small businesses are often reluctant to provide life insurance, disability insurance and dependent care assistance to their employees. As the cost of benefits increases, small business becomes less able to afford these benefits for its employees. Yet providing these benefits through the private sector and the work place is a critical social concern for this country, particularly as the population assistance is forthcoming, small businesses may be unable to provide these significant benefits for their employees.
Cafeteria plans for small businesses
An employee benefit delivery system which could alleviate some of the additional costs in this area and significantly increase the availability of health insurance, disability insurance and dependent care assistance is the cafeteria plan. As efforts continue to increase employee benefits for small business employees, the cafeteria plan should not be overlooked. Employee pay-all plans allow employees to select among a variety of benefits and pay for these benefits by reducing their salaries. Employer funded plans provide each eligible employee a certain amount of employer dollars, sometimes referred to as “cafeteria plan dollars” which the employee allocates among a variety of benefits. Some companies require that these employer “dollars” be allocated first to health insurance benefits, with the employee allocating any remaining cafeteria dollars to other benefits as the employee chooses. The employee may cash out, generally at a discounted rate, any dollars which the employee does not use to acquire cafeteria plan benefits. Under this plan design, the employees first allocate employer provided “cafeteria plan dollars” among the available benefits. 2] tax benefits of cafeteria less of the type of cafeteria plan offered, each plan allows eligible employees to choose between receiving particular qualified benefits and cash. Prior to the beginning of a plan year, eligible employees must elect between receiving their full salary, on the one hand, and deferring a portion of their salary and/or applying their cafeteria plan dollars, on the other hand. The employee deferred salary and employer cafeteria plan dollars will then be used to pay for the selected benefits. The election, once made, is generally irrevocable for the plan year, absent certain major changes in circumstances. Thus, the state and federal governments incur reduced revenues (lower income, fica and futa taxes), but important social welfare benefits are provided through the private cafeteria plans, employees can pay for a wide variety of benefits, such as health insurance, child care, care for elderly dependents, or out-of-pocket medical costs, with pre-tax dollars, selecting from among the benefits offered only those benefits which they want. While employers determine the benefits to be offered under the cafeteria plan, employees have the flexibility to select only the particular benefits that are of greatest value to them. Thus, flexibility in the selection of benefits and affordability through the use of pre-tax dollars are the hallmarks of the cafeteria plan. 3] premium conversion s the most simple cafeteria plan is the “premium only” plan or “premium conversion” plan. In a salary reduction plan, prior to the beginning of the plan year, the employee authorizes a salary reduction which can then be used to acquire specified benefits. Therefore, the salary reduction amount is used by the employer to pay the employee’s share of health insurance premium conversion plan may be used as part of a variety of different premium payment arrangements. Under this approach the employer’s contribution is simply to create and administer a cafeteria plan so that employees may convert their premium payments from after-tax to pre-tax dollars. Regardless of the level of the employer’s contribution, however, if the insurance is an eligible benefit and the cafeteria plan is properly structured and administered, the employee’s portion of the premium will be paid with pre-tax dollars. Salary reduction plan is a cafeteria plan in which eligible employees have a choice to receive their full salary in cash or to have their salary reduced, with the salary reduction used by the employee to pay for one or more employee benefits offered under the plan. The employee’s election, once made for a plan year, is (with certain exceptions) irrevocable, and the salary reduction amount is taken ratably from each paycheck throughout the year. If the choice to defer salary is offered under a qualified cafeteria plan, the employee is not deemed to be in constructive receipt of the salary reduction amount and the salary reduction amounts do not constitute w-2 wages and are not subject to income, fica or futa taxes. 5] flexible benefits gh a cafeteria plan may be funded solely using voluntary employee deferrals, employer contributions may also be used. Under these plans employees are permitted to purchase additional non-taxable benefits using salary reduction dollars and may be permitted to receive a certain amount of cash if they do not want to apply the full amount of employer contributed dollars towards acquiring non-taxable benefits. If employer cafeteria plan dollars exceed the amount the employee can use effectively, the employee can cash out the excess. On the other hand, if the employer cafeteria plan dollars are less than the amount the employee prefers to spend on the available benefits, the employee can increase the available dollars through salary reductions. 125(f) defines the benefits that may be offered under a cafeteria plan as “any benefit which, with the application of subsection (a), is not includible in the gross income of the employee by reason of an express provision of this chapter (other than section 106(b), 117, 127, or 132). 1] wide variety of benefits may be offered in cafeteria provisions excluding certain items from income (and thus, allowing those items to be included in a cafeteria plan) are found in i. The benefits that may be offered through a cafeteria plan include:(i) accident or health plan coverage (i. 106), including traditional group health insurance, insurance through health maintenance organizations (“hmos”), insurance through preferred provider organizations (“ppos”), self-insured medical reimbursement plans, accidental death and dismemberment policies, hospital indemnity policies, cancer insurance policies, short and long term disability policies, medicare supplemental coverage and medicare part b premiums, employee contributions under a workers’ compensation act, prepaid vision, prepaid prescription drugs and prepaid discount plans. The benefits expressly excluded from a cafeteria plan, perhaps the most troubling, from the viewpoint of public policy, is long term care insurance. 2] two common benefits offered under cafeteria plans: health flexible spending accounts and dependent care assistance benefits often provided under a cafeteria plan are the health flexible spending arrangement (health fsa) and the dependent care assistance plan (dcap). The health fsa can be used to reimburse the employee for medical or dental expenses incurred during the plan year that were not reimbursed through insurance or other arrangements. Certain benefits involve risk and of the benefits that may be offered under a cafeteria plan umbrella is subject to its own set of requirements in order to qualify for preferred tax treatment. In addition, each of the individual benefits is subject to its own set of discrimination individual benefits are packaged under the cafeteria plan umbrella, additional requirements are imposed.
Simply because benefits are offered through a cafeteria plan, an entire additional layer of discrimination tests become applicable. Other rules significantly restrict the circumstances under which an employee may change an election regarding his or her level of participation during a plan year. This additional layer of regulations adds to the complexity and cost of administering cafeteria plans and tends to discourage small business, in particular, from offering employees benefits through a cafeteria plan. Self-insured medical reimbursement plan is an employer plan to reimburse employees for expenses of medical care not reimbursed under a health and accident insurance policy. The key characteristic of these plans is that they are self-insured: seldom is reimbursement provided by a company regulated as an insurance company (e. 105, which regulates self-insured medical reimbursement plans, in order to deal with plans that essentially functioned as major medical insurance. Health fsas, which cover only those expenditures not reimbursed by the employee’s major medical insurance plan, were not common at that time. Nonetheless, they fall within the definition of a self-insured medical reimbursement plan included in i. As a result, some of the rules applicable to a traditional self-insured medical reimbursement plan, when applied to a health fsa, simply do not make sense. A] health fsas must exhibit risk-shifting and risk-distribution of these rules is that health fsas must qualify as accident or health plans. Regulations require that any self-insured medical reimbursement plan, including a health fsa, “exhibit the risk-shifting and risk-distribution characteristics of insurance. While this requirement may make sense when applied to a self-insurance program that essentially substitutes for full-blown major medical health and accident insurance, applying these risk-shifting principles to a plan that uses the employee’s own salary to fill in the gaps under a primary medical insurance plan seems misplaced. If the employee does not file health fsa claims equal to the full salary reduction amount in a plan year, he or she forfeits the balance. While the employer may choose to use the forfeited amounts to increase the total assets available to all employees the following year under the cafeteria plan, this is not required. The health fsa must provide “uniform coverage” throughout the plan year so that the maximum reimbursement amount is available at all times during the plan year (reduced by prior reimbursements). Once the plan year begins, the employee may file claims up to the employee’s full salary reduction amount, even if these claims exceed the amount already withdrawn from his or her salary during the plan year and contributed to the employee’s health fsa. The employee must be able to claim the full $1,300 (less any previously reimbursed amounts) at any time during the plan year. Thus, if the employee incurs medical expenses in the first month of the plan year and submits $500 of valid medical reimbursement claims, the employer must reimburse the full $500, even though the employee’s salary reductions at the time of the claim only amount to $100. Under these circumstances, the terms of the particular cafeteria plan may not permit reimbursement of the entire amount when initially paid by the employee since much of the medical treatment will not be provided until after the initial payment. Elections difficult to change during plan election to take a salary reduction in order to be able to pay for certain benefits with pre-tax money, or to take a cash out, once made, is difficult to change during the plan year. Within a given level of salary reduction, however, the employee may have somewhat greater flexibility to change among related benefits, that is to select a different coverage the cafeteria plan permits, the salary reduction and cash out elections may be modified within the plan year only if one of thirteen events occurs and the change is on account of and consistent with the event. For example, if premiums for health care insurance increase in the middle of the plan year by a small percentage, then the employee may automatically increase salary reductions in order to be able to pay the excess premium with pre-tax dollars and maintain the level of coverage. If the cost of a benefit increases or decreases substantially during the plan year, the employee may commence or terminate participation in the particular benefit. For example, an employee with fee for service indemnity health care insurance might decide to switch to hmo coverage if the premium costs for the indemnity insurance increased significantly during the plan year and both types of insurance were offered by the cafeteria plan. Conversely, if a coverage option improves significantly or if new options are made available during the plan year, employees may commence salary reductions in order to acquire the new or improved benefit. If coverage by a plan available to a spouse or dependent changes significantly, and the plan years of the two plans are not comparable, then the employee may increase or decrease salary reductions in order to obtain or terminate coverage with respect to the particular benefit under the plan available to the employee. For example, if a husband and wife work for different companies, each of which offers health insurance under a cafeteria plan but the plan years are not coordinated, and the husband’s plan offers in a new plan year a significantly improved health insurance option, then the wife may terminate salary withdrawals in the middle of her plan year in order to terminate health insurance coverage under her cafeteria plan so that the family can be covered solely under the husband’s plan. Vii) loss of coverage under a group health plan of a governmental or educational institution. An employee may prospectively add coverage for the employee, spouse or dependent if the employee, spouse or dependent loses coverage under a group health plan sponsored by a governmental or educational institution (e. An employee taking leave under the fmla may revoke an existing election of group health plan coverage and make a different election for the remaining portion of the period of coverage provided under the fmla. Although these changes are not technically event related, a cafeteria plan may permit an employee to modify or revoke his or her 401(k) contribution election during a plan year if the change is permitted under the 401(k) plan itself. Hipaa requires group health plans to provide special enrollment periods (i) for individuals who declined participation because they were covered under a different group health plan at the regular enrollment time and later lost that coverage and (ii) for individuals who become dependents during the plan period through marriage, birth, adoption or placement for adoption. For example, if an employee’s child loses dependent coverage under a health plan but remains a dependent for income tax purposes, the employee may increase salary reductions in order to permit the child to obtain cobra coverage. An employee may prospectively reduce salary reductions upon becoming eligible for medicare or medicaid, or, if the employee loses eligibility for these programs, may prospectively increase salary reductions in order to replace medical non-highly compensated employees (“nhces”) with minimal incomes, making an irrevocable election for an entire plan year may involve more financial risk than the employee can comfortably undertake. The virtually irrevocable nature of the election significantly reduces the effectiveness of the plan for lower income employees, which also makes it more difficult for hces and key employees to participate and satisfy the discrimination tests.
Discrimination rules applicable to cafeteria order for participants and companies to obtain favorable tax treatment, cafeteria plans must satisfy certain requirements designed to ensure that the plans are not discriminatory and do not unduly favor highly compensated or key employee participants. While one could conceivably argue that these rules help rank-and-file employees of large companies (probably a difficult argument to make…), when applied to small business, the net effect often is that small businesses simply decline to offer cafeteria plans and employee benefits to any employees. 1] applicable discrimination the cafeteria plan and the component plans for each of the benefits offered in the cafeteria plan must comply with certain discrimination requirements. For cafeteria plans, the discrimination rules impose three separate tests: (i) an eligibility test, (ii) a contributions and benefits test and (iii) a key employee concentration test. More than 5% stockholder includes any stockholder owning more than 5% of the voting power or 5% of the value of all classes of stock of the employer in either the current or preceding plan year. 125(e) does not define “highly compensated,” the standard applicable to 401(k) plans is that which is generally used. Thus, except for fiscal year plans that make a calendar year data election, the 2002 threshold of $90,000 will be compared to an employee’s 2002 compensation when testing for the 2003 plan year, and the 2001 threshold of $85,000 will be compared to an employee’s 2001 compensation when testing for the 2002 plan year. Companies with a large number of employees receiving incomes over the annual compensation limitations can reduce the number of employees considered “highly compensated employees” by making certain elections limiting employees who are considered to be in the “top–paid concept of key employees was developed in the context of qualified retirement plans to determine whether a retirement plan is top–heavy and thus subject to the top-heavy rules. Except for the cafeteria plan, the concept of a key employee is not applied to other types of employee benefits. For purposes of cafeteria plans, “key employees” are defined as officers having annual compensation greater than $130,000 (indexed for inflation), a more than 5% owner, or a more than 1% owner having annual compensation of more than $150,000 (not indexed). Thus, in a small business, a spouse working two days a week could be considered a key employee simply because the other spouse is a more than 5% eligibility test determines whether a sufficient number of non-highly compensated employees are eligible to participate in the plan. This test is satisfied if (i) the cafeteria plan benefits a non-discriminatory classification of employees, (ii) the same employment requirement applies to all employees, (iii) no more than three years of employment is required for participation, and (iv) participation is not delayed beyond the first day of the plan year after the employment requirement is be non-discriminatory, a classification used to determine eligibility to participate in a cafeteria plan must be reasonable and based on objective business criteria such as job categories, nature of compensation (salaried or hourly wages) or geographic location. In addition, the classification may not have a discriminatory effect, that is, regardless of its objective apparent reasonableness, it generally may not result in the percentage of nhces eligible to participate in the plan being less than 50% of the percentage of eligible hces (although there are some exceptions). Having separate cafeteria plans for salaried and hourly employees, for part time and full time employees, for employees in different divisions of a company generally is not acceptable. The “availability” test determines whether each eligible employee who decides to participate in the plan is given an equal opportunity to select qualified benefits. The “utilization” or “concentration” test looks at the actual operation rather than the plan design to determine whether hces actually receive disproportionate benefits (essentially because nhces are not participating at a sufficiently high rate). The “operations” test looks at whether the plan discriminates in favor of hces in actual operation, for example, because a benefit is offered only during a period in which hces can utilize the plan. 4] key employee concentration key employee concentration test requires that qualified benefits provided to key employees not exceed 25% of the total of all benefits provided for all employees under the plan. As in the retirement plan context, the cafeteria plan discrimination tests involving key employees generally impact only small business plans. Small business plans have difficulty satisfying the key employee concentration test since, as a general rule of thumb, that test is difficult to satisfy if key employees represent 10% or more of the total number of employees. Even if all eligible employees participate and elect a particular benefit, the plan may be “discriminatory” under the key employee concentration test simply because the company has a large proportion of key employees compared with non-key employees. This is often the case in smaller example, if a company has 3 key employees, each of which elects $2,000 of nontaxable benefits under a plan, and 7 non-key employees, each of which elects the same $2,000 of nontaxable benefits, the plan will fail the key employee concentration test ($6,000/20,000 = 30% of benefits attributable to key employees, significantly in excess of the 25% threshold that benefits received by key employees may represent of total benefits received by all employees). From a policy viewpoint, it is difficult to justify the application of this test when all employees are able to select from the same benefits and choose to reduce their salaries by the exact same amount and/or apply the same employer cafeteria plan dollars. 5] consequence of failing discrimination the cafeteria plan fails any of the discrimination tests, then hces and key employees who participate in the plan must include in income the highest value of taxable benefits that the individual could have selected under the cafeteria plan, including both the maximum available cash-out amount (if any) and any actual salary reductions. Discrimination tests applicable to underlying of the benefits offered in a cafeteria plan is subject to its own set of discrimination tests. Because this chapter focuses on the use of cafeteria plans to enable employees to finance dependent care for children and elderly parents and to purchase long term health insurance for themselves and their spouse, this article will focus solely on the four discrimination tests applicable to dcaps: (i) the eligibility test, (ii) the contributions and benefits test, (iii) the more than 5% owner concentration test and (iv) the 55% average benefits test. The definition of “highly compensated employees” for purposes of the eligibility test for dcaps differs from the definition used for discrimination testing of cafeteria plans. In the dcap context, an hce is defined as an employee who owns more than 5% of the shares (or value) of the company or receives compensation from the company in excess of $90,000 for plan year 2002 or $85,000 for plan year 2001. In other words, the contributions and benefits test is designed to ensure that hces are not eligible to receive greater benefits than nhces or permitted to make smaller contributions for equivalent benefits as compared to nhces. 3] more than 5% owner concentration more than 25% of the total amount paid or incurred by the employer for dependent care assistance during the plan year may be paid to the group of individuals who are more than 5% shareholders (including their spouses and dependents). While this concentration test seems to mimic the key employee concentration test which is applicable to cafeteria plans, in fact these are two separate tests. The cafeteria plan test assesses the concentration of benefits provided to key employees, while the dcap test assesses the concentration of benefits provided to more than 5% stockholders. While there may be some de facto overlap in the two categories, cafeteria plans offering dcaps must satisfy both tests separately. The use of two separate concentration tests in this context is an example of the complexity of discrimination testing that makes small business shy away from cafeteria plans as too complicated and costly to administer. Accordingly, even though the dcap may be available on a non-discriminatory basis, unless a significant portion of a company’s employees needing dependent care assistance have family incomes sufficiently large to preclude their use of the dependent care tax credit, hces are unlikely to be able to take advantage of this significant address this issue, dcap plans provided through a salary reduction program are permitted to exclude from eligibility employees with compensation of less than $25,000.
Moreover, eggtra changed the credit to make it more advantageous to middle income taxpayers, thereby making it even more difficult for dcap plans to satisfy the utilization businesses, in particular, may find the more than 5% shareholder concentration test and the 55% average benefits test difficult to satisfy. In essence, in a small business, relatively small changes in the number of nhces and hces who are interested in participating in a dcap are more likely to disqualify the hces from achieving preferred tax treatment than would changes by the same number of employees at a larger company. But in many of the small businesses with 10 nhces each, the number of nhces wanting to participate could be significantly more or less than 5. Similarly, if the participation rate by hces nationally were, let us say 20%, and a small business had 10 nhcs, the number of hces in a particular small business wanting to participate could be significantly more or less than 2. In each of these situations, because the total number of hces and the total number of nhces is relatively small, the actual participation rates by hces and nhces in a particular small business may differ significantly from the national average, and many of these smaller businesses will be unable to satisfy the utilization tests. These companies would thus be unable to make the benefit available to their hces, and the small business could very well lose interest in offering the benefit to any of its employees. Many small business owners are prohibited ipating in cafeteria r factor that discourages small businesses from offering cafeteria plans is that self-employed individuals, such as sole proprietors, more than 2% shareholders in a subchapter s corporation (“sub-s corporation”), members in a limited liability company (“llc”) and partners in a partnership are precluded from participating in cafeteria plans. Unlike large, publically traded corporations (generally c corporations), which are typically owned by outsiders (pension plans, insurance companies, mutual funds and individual investors), small businesses typically are owned by key employees or highly compensated employees. In contrast with a large, publically traded company, in which ownership and management often are separated, in a small business, ownership generally is not separated from management and operation of the business. When owners of small businesses realize that they will not be able to benefit from cafeteria plans which they might want to offer to their employees, they simply lose interest. 1] cafeteria plans are valuable employee cafeteria plan is a unique employee benefit delivery system in that it allows employees to select from a number of benefits those benefits and/or mix of benefits most needed by the employee. Often not appreciated is that the cafeteria plan brings group plans of various benefits to employees at prices which employees could not otherwise obtain. As described above, each underlying benefit offered under a cafeteria plan is tested, in accordance with the rules set forth in the code for that particular benefit, to make sure it is not discriminatory. Paradoxically, benefits bundled together in a cafeteria plan are subject to yet another layer of discrimination tests simply because the benefits are offered under a cafeteria plan umbrella. Not only are many of these rules unnecessary; they cause small businesses to not provide cafeteria plans for their employees. Rather than ensure that benefits are available to all employees, these tests, particularly in the context of small business, often result in benefits being available to none. 2] cafeteria plans are not widely offered by small ing to the us small business administration (“sba”), in 2001 small businesses represented over 99% of all employers, created about 75% of net new jobs and accounted for 51% of the private sector output. Further, the sba estimates that in 2001 small businesses employed 51% of the private sector work force and 51% of workers on public assistance, and they represented nearly all of the self-employed, which were 7% of the workforce. Yet few of the employees working for a small business have access to health insurance, dependent care insurance, health fsas or other important benefits, in part because the company does not sponsor a cafeteria n 125 plans are available to roughly one third of all of the nation’s imately 13% of employees who work for companies with fewer than 50 employees are covered by a cafeteria plan. 33% of employees who work for companies who employ between 50 and 100 employees are covered by this type of plan. This percent stays roughly the same until one reaches companies who employ more than 1000 but fewer than 2,500 employees: 49% of the employees of these businesses are covered by cafeteria plans. 61% of employees who work for businesses that employ more than 2,500 employees are covered by cafeteria plans. 3] small business needs cafeteria a company chooses to provide a portion of health insurance coverage for its employees, but does not pay the entire premium, the cost of the premium paid for by the employees can be paid for with pre-tax dollars only if the company sponsors a cafeteria plan and offers health insurance as a benefit under the plan. This type of plan is often referred to as a “premium conversion” plan (described in more detail in §1. Conversely, if the company does not a cafeteria plan, the employee must use after-tax dollars to pay for the employee’s portion of the premium. Because cafeteria plans allow employees to acquire valuable benefits using pre–tax dollars and/or employer dollars, cafeteria plans are considered to be a viable means of providing additional health and other benefits for employees and their families than the employees would otherwise be able to surprisingly, cafeteria plans are very popular with employees. Because employees can afford under a cafeteria plan a variety of benefits which they often cannot afford if offered only as an individual plan, and because employees generally are able to select only those benefits which they want, cafeteria plans assist employees in obtaining a wide variety of important benefits at an affordable cost. The cafeteria plan can offer flexible health care spending accounts which allow employees to pay for deductibles and co-pays on a pre-tax basis. Often dependent care spending accounts are offered in the cafeteria plan to help employees pay for child care and elder care. Others believe that when employees are using their own dollars and have a choice of various health care delivery systems, they are more cost-conscious consumers of health real importance to the small business, however, is that a cafeteria plan can allow the small business to offer more benefits to its employees, so that the business is more able to “match” the benefits provided by larger employers and attract valued employees. Former employees of larger companies are often dismayed, when engaged by a small business, to find that their new employer does not offer a cafeteria plan and they, accordingly, are no longer able to select the benefits they want and pay for them with pre-tax dollars. This disparity in treatment between the employees of large and small business entities has no policy justification. The compensation of the highest paid employees in small businesses often is in line with that of mid-management at larger companies. Thus, an employee who is not a highly compensated employee in his position with a large company may suddenly find, when moving to a small business, that with no increase in compensation, he has suddenly become a highly compensated employee. While the benefits which the employee had received under a cafeteria plan in the larger company were not under scrutiny in discrimination testing, simply because the same employee, when joining a small business, suddenly becomes part of the “prohibited group,” these same benefits may lose their pre-tax status.
Given the need to increase access to health insurance, dependent care insurance and other important benefits, the concern that a highly compensated small business employee might receive a tax-free benefit, and thereby reduce income, fica and futa revenues, must be weighed against the benefits that can be delivered to all of the small business employees. The authors believe that expanding access to critical benefits through a private sector approach rather than public sector funds is an important public policy objective that can be fostered by creating a framework that encourages, rather than discourages, small business to offer employee benefits through the cafeteria plan umbrella. 1] variety of factors discourage small businesses from offering cafeteria ria plans are generally not available to small business employees. As discussed above, many small business owners are not even allowed to participate in their own cafeteria plan. Anti-discrimination tests often cut back the benefits of those small business owners who can participate to insignificant amounts. Complex rules, such as when an employee can change an election during a plan year, add to the problem. 2] “use it or lose it” rule discourages optimum level of employee elective xity in the cafeteria plan area, perhaps more than with respect to any other employee benefit, is caused by irs regulations. When a cafeteria plan is viewed through the “tax lens” rather than as a vehicle providing valuable benefits for employees, one can end up with bizarre results. 3] sole proprietors, partners, limited liability members and subchapter-s stockholders should be considered employees and allowed to participate in cafeteria mentioned above, sole proprietors, partners, members of limited liability companies and most stockholders in a sub-s corporation are not allowed to participate in a cafeteria plan. These types of entities represent a significant portion of american business and, for the most part, represent small and medium sized firms. Thus, approximately 78% of all non-farm businesses are organized in a manner under which the owners of the business are not permitted to participate in a business sponsored cafeteria the extent that the owners of these entities are also employees of the entities, the owners will be discouraged by this rule from offering cafeteria plans in which they, themselves, cannot participate. This rule discriminates against business owner/employees based solely upon the type of entity in which they are operating their business. To the extent that these entities are small or medium sized businesses, this rule makes it less likely that cafeteria plans will be available to employees of small and medium sized businesses. Because these entities choose not to sponsor a cafeteria plan, this rule works a particular hardship on the employees of small businesses. As a result, most employees of small businesses do not have available on a pre-tax, more affordable basis many of the basic benefits provided primarily through employment to employees of larger encourage small businesses to offer cafeteria plans, it is important that the owners of the more typical small business entities be considered “employees” for purposes of cafeteria plans. As long as they are considered “employees,” they can be covered by a cafeteria plan. As potential participants in the cafeteria plan, they would be more likely to sponsor the plan. It seems inherent in human nature, and clearly an understandable decision, that an owner would lose interest in a plan that costs money to implement and administer and therefore reduces profits if the owner is excluded from participating in the ely enough, it appears that small business owners could participate in some of the permissible benefits offered under a cafeteria plan, but for the cafeteria plan umbrella placed on top of the benefits. For example, if a dcap were offered outside the cafeteria plan, most experts believe that these small business owners could participate in the plan. 4] change the cafeteria plan discrimination rules so that owners can e of the dollar limitations and other discrimination rules imposed on many of the benefits offered under cafeteria plans, these plans are inherently non-discriminatory before being bundled into the cafeteria plan. To the contrary, as we have seen, each plan participant has the ability to reduce his or her compensation by the same dollar amount (not a percentage of compensation) and/or receive the same amount of employer dollars and then use these amounts to select among the employee benefits provided in the plan. Under a cafeteria plan, each individual benefit is separately tested under its own discrimination rules set forth in the code. Nevertheless, the cafeteria plan is subjected to additional tests for all the benefits in the aggregate. For example, the key employee concentration test requires that no more than 25% of the total benefits used by the plan participants can be allocated to key employees as defined under i. As we have seen, many small businesses are unable to satisfy this test simply because in small businesses key employees tend to represent a larger proportion of total employees than they do in larger entities. Because the ability of a business to satisfy this test depends so highly on the mix of employees, it does not serve to measure “fairness” or “discrimination” in the cafeteria plan. The key employee concentration test provides no meaningful protection to non-key employees and significantly discourages small business cafeteria plan formation. 5] change the dependent care discrimination ts offered under a cafeteria plan are subject to two layers of discrimination testing. One set of tests applies to the benefit itself, whether or not provided through a cafeteria plan. The second applies simply because the benefit is offered through the umbrella of the cafeteria plan. Perhaps the most egregious example of this duplicative, costly and confusing layering of discrimination tests arises in the context of the dependent care assistance plan offered through the cafeteria plan vehicle. Three separate concentration tests apply: the more than 5% owner concentration test and the 55% average benefits tests applicable to dcaps and the key employee concentration test applicable to all benefits offered under a cafeteria plan. These tests, and outdated limits on the maximum benefit that may be offered, need to be changed in order to encourage small business to offer dcaps to their employees. If offering lower income employees a dependent care tax credit, and phasing out this tax credit for higher income employees is deemed to be good policy, then it is undesirable and unfair that the dependent care tax credit would result in reducing or eliminating the availability of the dcap for e the dcap under a cafeteria plan allows each employee to reduce his or her salary by the exact same amount or use the same amount of “cafeteria plan” dollars, all of these limitations (except for the dollar cap) operate as unnecessary and additional hurdles for this valuable benefit. Even though the focus here is on small business, apparently these tests often cause much larger plans to fail the anti-discrimination tests as well.
Since the dcap benefit can allow employees to provide higher quality child care or care for elderly parents than they could otherwise afford (since the benefits are not taxed if the plan is qualified), from a policy viewpoint, it would seem desirable to make sure this benefit is available to as many employees as possible. 6] the flexible health care spending account and dependent care assistance account should be treated as reimbursement accounts rather than ss originally intended that cafeteria plans enable employees to pick and choose among a variety of benefits rather than simply receive a group of company selected benefits, some of which were not needed or wanted by a particular employee. Some of these benefits come with tax advantages — for instance, if an employee is willing either to reduce his salary or, if applicable, apply cafeteria dollars to a health fsa, then the dollars contributed to the health fsa are pre-tax dollars. In permitting this pre-tax treatment for flexible spending arrangements, the service required an element of risk-shifting and risk-distribution inherent in an accident or health plan. Employment decisions simply are not based upon a risk that an employee might leave a position early in a plan year several years after first being hired by a company and thereby, incidentally, receive in health reimbursements more than the employee contributed to his or her health fsa in a particular year. Rather, these rules imposing risk simply appear to be a way to stem the use of cafeteria plans and minimize the loss of revenue to the fisc from reduced fica, futa and income taxes. More appropriate model for the health fsa or dcap cafeteria plan is the 401(k) plan. 7] cafeteria plans should allow employees to change their benefit elections on a prospective basis throughout the plan to irs regulations, employees are allowed to change their benefit elections during a plan year only under limited circumstances. Because the dollars that the employees are applying towards various benefits are their own dollars (whether by salary reduction or by the application of cafeteria plan dollars), and more importantly, in order to encourage employees to elect needed benefits, employees should have the flexibility to change their benefit elections prospectively at reasonable, periodic intervals throughout the plan year. Just as defined contribution plans may allow employees to change their deferrals prospectively periodically during the plan year, so, too, should cafeteria plans be permitted to give employees flexibility to change their elections prospectively at more frequent intervals. This increased flexibility will make cafeteria plans more useful to employees in solving their health, dependent care and/or insurance needs. For instance, the limit could be $10,000, indexed for increases in the cost of living, with an additional $5,000 limit if the plan participant has more than one dependent or perhaps has certain types of health care problems which are generally not covered adequately by health insurance coverage (for instance, mental health care problems). Some companies have adopted policies that provide dollars forfeited by employees in one year will be applied to benefits or “cafeteria” dollars for all employees in the following year. A] options for dollars not used by the than forcing employees to spend health care dollars on items they do not necessarily need in order to use up their health fsa dollars or providing that employees must forfeit unused dollars, the rules could be changed so that the total amount that an employee or employer could contribute in a single year to the employee’s health fsa would be limited, but employees could either “carry over” unused dollars to the next year or sweep them into a 401(k) plan (if available and if irc §415 limitations have not been exceeded). In this manner, employees would not be allowed to exceed any of the cafeteria plan limitations regarding total annual contributions to a health fsa, but if needed, employees would be allowed to carry over unused contributions to subsequent years until the total amount was consumed. Add long term care insurance as a qualified term care insurance should be a qualified benefit which employers are able to make available to employees on a pre-tax basis under a cafeteria plan. As a matter of policy, employees should be encouraged to plan financially for the possible need for long term care. Cafeteria plan that allows employees to select a long term care insurance plan (possibly tailoring it to their needs with different levels of coverage and different price ranges) would assist employees in making an educated decision and would encourage wider coverage by making this employee benefit more affordable. Not only would the group price likely be lower than what each employee could obtain individually, but using pre-tax dollars to purchase the insurance would also make the insurance more long term care insurance available on a pre-tax basis through payroll deduction (or in an employer dollar plan, through “cafeteria” plan dollars) may significantly increase the ability of nhces to plan for their future possible long term care needs. Based upon the success of the 401(k) plan, one can assume that employees who decide to finance their long term care through purchasing long term care insurance are more likely to purchase this insurance protection if they can finance the purchase through payroll deduction. Whether employees are more likely to select long term care insurance as a benefit choice when they do not have to find a plan on their own remains to be seen. Allowing medical savings accounts (“msas”) to be an option under the cafeteria plan would be an ideal way to see if employees would choose to set aside funds for future health care costs if they could do this on a pre-tax basis. The federal government could permit companies to offer msas and high deductible insurance coverage as a linked choice under a cafeteria plan, thereby affording employees another option. The simplified small business cafeteria eration should be given to providing small businesses with a simplified cafeteria plan. This voluntary simplified plan design could provide reduced discrimination testing in exchange for simplified eligibility requirements and required employer contributions of cafeteria plan dollars. Similar to the simple 401(k) plan, the employer’s required contribution could be a nonelective contribution of 2% of compensation for all nhces or possibly a 3% match of nhces’ salary reductions. 1] change the cafeteria plan eligibility rules to those of the 401(k) ng the cafeteria plan eligibility rules to those used in the 401(k) simple would allow employees to become eligible to participate in the cafeteria plan sooner than under the current rules. Currently, employees generally must wait three years to become eligible to participate in a firm’s cafeteria plan. This change would increase the availability of cafeteria plan coverage to more small business employees. As in the simple 401(k) plan, small businesses would bring eligible employees in on an entry date for ease of administration. Again, as in the simple 401(k) plan, one entry date would coincide with the beginning of the plan year and the second would be the first day of the seventh month of the plan year. 2] streamline the discrimination tests applicable to the small business cafeteria authors recommend that under a simplified small business cafeteria plan only those discrimination tests applicable to an individual underlying plan benefit would be applied to that benefit, but the overarching discrimination tests imposed simply because various benefits are packaged together in a cafeteria plan would be eliminated. 5], supra, many nhces select the tax credit, which causes the plan to fail the dcap discrimination tests. 3] mandatory employer as safe harbors have been created to assist employers offering 401(k) plans to comply with discrimination requirements, so, too, the authors believe, safe harbors for satisfying discrimination standards could be created to ensure fairness and adequate protection of employees, while sufficiently simplifying the administrative and cost burdens for small businesses and sufficiently increasing the likelihood that hces and keys will achieve favorable tax treatment in order to encourage small businesses to offer cafeteria example, in order to qualify for the simplified small business cafeteria plan, the company would be required to make a contribution on behalf of all eligible plan participants. Under the simple 401(k), the employer is required to match the employee’s elective contribution on a dollar-for-dollar basis up to 3% of compensation for the plan year or to make nonelective contributions of 2% of compensation for each eligible employee, whether or not a particular employee elects, in addition, to authorize salary reductions.
This employer nonelective contribution would be made for all eligible employees who have at least 1,000 hours of service during the plan year. On the other hand, the nonelective contribution would provide a contribution for all eligible employees so that the lower income taxpayers who cannot afford to reduce their salaries can still ria plans offer a flexible vehicle through which employees may select among a variety of benefits offered and in many cases use pre-tax dollars to acquire the benefits most useful to them. Whether funded with employee salary reduction dollars or employer cafeteria plan dollars, or a combination of both, the cafeteria plan provides a flexible private sector method for encouraging greater access to health care, dependent care, (hopefully, in the future, long term care insurance) and other benefits, inadequate access to which are considered significant public policy issues. Yet the increased ability of the private sector to provide these important benefits for workers and their families, rather than relying on the public sector to provide these benefits, may well justify the loss of revenues to the ng statutes and regulations, however, discourage small business from offering cafeteria plans to their employees. Antiquated limits on the value of dependent care assistance plans that may be offered to employees, multiple layers of discrimination testing on benefits and plans that are inherently not discriminatory, risk shifting requirements that are inapposite and discourage optimum use of benefits, regulations that exclude owners of many businesses from participating in cafeteria plans, exclusion of long-term care insurance and medical savings accounts as qualified benefits and limitations on employee’s flexibility to change their elections prospectively within a plan year all converge to discourage small business from offering cafeteria plans and employees from taking maximum advantage of cafeteria plans that are simplified small business cafeteria plan may offer just the added incentive to encourage small businesses to offer critical benefits through a cafeteria plan umbrella. By reducing discrimination testing, creating safe harbors using required employer contributions and simplifying eligibility requirements, a simplified small business cafeteria plan, based largely on the simple 401(k) model, may enable a larger percentage of employers to make basic employee benefits available to workers and their families at an affordable cost and ensure that the choice to work with a small business will less frequently require employees to forego the tax-advantaged access to benefits formerly available to them under cafeteria . Calimafde is a partner in the law firm, paley, rothman, goldstein, rosenberg & cooper, chartered, in bethesda, maryland, where she heads the qualified retirement plan department. She is a frequent witness before congress, particularly before the house ways and means committee and the senate finance committee, on such topics as “private retirement plans and oversight of the internal revenue service,” “pension access and simplification issues,” and “increasing savings for retirement. Calimafde is the current chair, past president and a member of the board of directors of the small business council of america, inc. The only national non-profit organization which represents the interests of privately owned businesses exclusively in the tax and employee benefits area. She is a member of the qualified retirement plan department, the estate planning department and the trust and estate administration department. Calimafde for this tax institute in 2000 and ss owner's ss owner's ing your orating your g your ting your ss resources for to ng on your ss structure e business : time to startup! Management & hrlearn more about the resources available for office & cafeteria benefit plan option in health care act makes offering employee benefits under office & of the more little discussed elements of the obamacare law is the creation of a streamlined system for small employers to offer pre-tax benefit plans to their employees. Popular method of providing employee benefits, a cafeteria plan is a written plan maintained by an employer for its employees under which participants receive certain benefits they choose on a pretax basis. Effective january 1, 2011, the patient protection and affordable care act (aca) provides eligible small employers with the option of a simple cafeteria plan. The main advantage of the simple cafeteria plan over the traditional option is that it removes the obstacle of nondiscrimination requirements favoring highly compensated and key employees which disqualify many small ria plans ipants in cafeteria plans--governed by internal revenue code section 125--choose from a “menu” of benefits, hence the “cafeteria” label. Participants in a cafeteria plan must be allowed to choose among at least one taxable benefit (for example, cash) and one qualified benefit. A cafeteria plan can’t include benefits that defer written plan must specifically describe all benefits and establish rules for eligibility and ria plans are funded through employee contributions made on a pretax basis, sometimes in combination with employer is so advantageous about offering employee benefits through a cafeteria plan? A cafeteria plan is the only means by which an employer can offer employees a choice between taxable and nontaxable benefits without the choice causing the benefits to become ees’ pretax contributions mean they enjoy tax savings while paying for valuable benefits, and employers save on the amount of federal payroll taxes owed when employees’ taxable pay is reduced. It’s a win-win for both employer and ional cafeteria plans are subject to nondiscrimination rules meaning that a plan cannot favor highly compensated employees as to eligibility to participate, contributions, or benefits. Spouse or dependent of any of the rly, if a cafeteria plan favors key employees, which occurs when more than 25 percent of the total of nontaxable benefits provided for employees go to key employees, the value of the taxable benefits that employees could have selected are included in the employees’ wages. A key employee is:An officer having annual pay of more than $165,000, employee who is either:A 5 percent owner of the business. 1 percent owner of the business whose annual pay is more than $150, employers can easily run afoul of cafeteria plan nondiscrimination rules. For example, the percentage of a plan’s pretax benefits may favor key owner/employees simply because of the fewer number of employees make it possible for more small employers to take advantage of cafeteria plans, congress amended the internal revenue code to allow eligible employers' cafeteria plans to qualify as simple cafeteria plans. Simple cafeteria plans are treated as meeting certain nondiscrimination requirements and benefits for cafeteria a simple cafeteria plan an option for you? First step in determining whether a simple cafeteria plan is an option for you is to determine whether you are an eligible employer. Your plan must then meet eligibility and participation requirements as well as contribution le small employers. In that case you are eligible if you reasonably expect to employ an average of 100 or fewer employees in the current may be wondering what happens to your eligibility if you grow your business and pass the 100 mark for employees. In later years, if you employ up to 200 employees, you’re still considered an eligible employer and can keep the simple cafeteria plan that you established when you had fewer ility and participation requirements. These requirements are met if both of the following are met:All employees who had at least 1,000 hours of service for the preceding plan year are eligible to participate; le employees who participate in the plan may elect any of the plan benefits ers do have the option of excluding the following employees from a simple cafeteria plan:Employees who are under 21 years of age before the close of the plan ees who have less than a year of service with the employer as of any day during the plan ees who are covered under a collective bargaining ees who are nonresident aliens working outside the unites states whose income did not come from a united states’ bution requirements. Employers can meet the simple cafeteria plan contribution requirements by making a contribution to provide benefits to each employee who is not a highly compensated or key employee—known as a qualified employee—in an amount equal to:A uniform percentage (not less than 2 percent) of the employee’s compensation for the year, amount which is the lesser of:At least 6 percent of the employee’s compensation for the year, the amount of each qualified employee’s salary reduction contributions not included in the employee’s gross the contribution amount is based on the second option, the rate of contribution to a highly compensated or key employee’s salary reduction contribution cannot be greater than the rate of contribution to other you are considering a simple cafeteria plan, take into account the added benefit available to you if you are incorporated. Simple cafeteria plans provide a safe harbor from the majority of nondiscrimination rules stopping many small business owners from availing themselves of this benefit. Experts are always available m-f 8:00-7:00 uscontact uspartner with ss owner's toolkitbusiness license wizardincorporation wizard blog: time to startup! If legal advice is required, please seek the wright tremaine > employment > simple cafeteria plans – key to keeping key ria plans are regularly adopted by larger companies to allow employees to choose health care and other employee benefits that fit their needs from a menu of employer-sponsored benefits. Under internal revenue code § 125, employers may offer cafeteria plan participants the choice to pay for health insurance coverage, dependent care costs and out of pocket medical expenses on a pretax basis for both income and payroll taxes.
Thus, cafeteria plans offer employees the flexibility they desire and provide both employees and employers with needed tax traditional cafeteria plan, however, has not been desirable for small and family owned businesses due to restrictions on employee eligibility and discrimination in favor of key or highly compensated employees. Sole proprietors, partners in a partnership, members of an llc, and individuals owning more than 2% of an s corporation) are precluded from participating in a cafeteria plan. Additionally, and more importantly, a cafeteria plan cannot favor highly compensated employees as to eligibility to participate, contributions, or benefits and cannot allocate more than 25% of the total of nontaxable benefits provided for employees to key employees. For 2014, a key employee is generally an employee who is either an officer who has annual pay of more than $170,000, an employee who is a 5% owner of the business, or an employee who is a 1% owner of the business with annual pay of more than $150,000. Because small and family owned businesses tend to employ a higher percentage of key and highly compensated employees, there has been little or no incentive to offer employee benefits through a cafeteria plan as a result of these nondiscrimination ss recognized this shortcoming and, as part of the affordable care act, amended the internal revenue code to encourage small businesses to take advantage of cafeteria plans by creating a safe harbor for plans that qualify as simple cafeteria plans. Effective january 1, 2011, if an eligible employer satisfies certain participation and contribution requirements, its simple cafeteria plan will be deemed to meet the nondiscrimination requirements under the new safe harbor without conducting any testing. Although the amendment unfortunately did not change the cafeteria plan rules with respect to excluded owner-employees, there is still an incentive for these owners to provide benefits for their employees and save on payroll taxes through employee salary employers are eligible to adopt simple cafeteria plans? Are eligible to adopt a simple cafeteria plan if they have employed less than 100 employees during either of the two preceding years. Recognizing the need for growth, however, congress provided that an employer that adopts a simple cafeteria plan while eligible will remain eligible until it employs on average 200 or more employees on the business days during the year. In the event that 200 or more employees are employed, the employer may offer the cafeteria plan through the end of the plan year, but then must either terminate the plan or conduct nondiscrimination testing outside of the simple cafeteria plan safe employees must be allowed to participate? Employees with at least 1,000 hours of service in the preceding year must be allowed to participate in the cafeteria plan and to elect any of the benefits offered under the plan. Self-employed individuals, partners in a partnership, members in an llc, and more-than-2% s-corporation shareholders may not must an employer contribute to the cafeteria plan? Order for a simple cafeteria plan to qualify under the safe harbor, the employer must contribute qualified benefits equal to (1) a uniform percentage (not less than 2%) of the employee’s compensation for the plan year, or (2) an amount equal to at least 6% of the employee’s compensation for the plan year or twice the amount of salary reduction contributions of each qualified employee, whichever is less. If the employer elects the latter contribution, the rate of contribution to a key or highly compensated employee cannot be greater than the rate of any other gh the simple cafeteria plan law is not new, implementing regulations have been overlooked in the midst of the other changes under the affordable care act. That said, we expect the popularity of simple cafeteria plans to increase as small and family owned businesses look for additional ways to offer flexibility to and increase retention among their employees. Employers should be aware, however, that the “simple” name may be misleading and are advised to consult with employee benefits counsel before adopting any form of cafeteria ght © 2017, davis wright tremaine llp. All rights gy, design, marketing & support by ss reneur live ise 500 ss opportunities iption on the next to articles to add them to your what it takes to launch, sustain and grow a michelle benefits of cafeteria maximizing your employee benefits package--and saving money--with a section 125 flexible benefits of the most underrated and underused employee benefits available for small businesses today is outlined in section 125 of the u. A section 125 or "cafeteria" plan allows employees to withhold a portion of their pre-tax salary to cover certain medical or child-care expenses. And because the pre-tax benefits aren't subject to federal social security withholding taxes, employers win by not having to pay fica--or workers' comp premiums--on those so many advantages, why is the plan underused? The most likely reason is that these plans don't generate a lot of profit for benefit administration companies, and with little profits to earn, only minimal advertising is being done. But utilizing the tax code for your business can be an incredible way to enhance your employee benefits package, while simultaneously boosting your a cafeteria plan, your employees can take advantage of three specific flexible benefits:1. Pop plans allow employees to elect to withhold a portion of their pre-tax salary to pay for their premium contribution for most employer-sponsored health and welfare benefit plans. The plan offers a simple way to obtain favorable tax treatment for benefits already offered. A pop plan is the simplest type of section 125 plan and requires little maintenance once it's been set up through your payroll. In addition, by paying for dependent care with pre-tax dollars, your employees can save approximately 20 to 40 percent on their child-care best part about the section 125 plan is that most of your employees are already paying for these expenses out of their own pockets with after-tax dollars. Cafeteria plans offer them a remarkable way to save money they're already 's how it works:prior to the beginning of each plan year, an employee estimates how much they'll spend in out-of-pocket medical expenses and/or dependent care expenses during the course of their plan year. It's important for employees not to overestimate their annual election amounts, as the fsa is a "use it or lose it" benefit and they'll forfeit any unused balance remaining in the account at the end of each plan year. There's a grace period for which an employee can file claims for each plan year. If there's a fsa surplus at the end of the plan year, the remaining balance shall be retained by the employer to offset administrative expenses or future employee benefit amount is then deducted over the course of the plan year from their paychecks prior to being taxed and is deposited into their flexible spending account. On or after the first day of the plan year, an employee is restricted from changing or revoking the section 125 agreement with respect to the pre-tax premiums until the plan year has ended unless a "change in family status" occurs (as defined under the federal tax code) and the change is consistent with the "change in family status. Your employees would pay their out-of-pocket expenses upfront and then submit a claim and documentation to the plan administrator. In many cases, this savings can add up to as much as 20 percent of every dollar being passed through the enting a cafeteria plan can "soften the blow" of premium increases to employees. If these additional costs are run through a pop plan, an employee in the 25 percent tax bracket would have an increase of just $45, rather than $ees can use tax savings to invest in retirement plans. In a cafeteria plan reduces an employee's taxable salary and increases the percentage of their take-home pay, thus increasing their spendable receive a greater deduction on dependent care expenses than what's offered by a traditional tax credit at the end of 's less of an impact on employees from insurance increases, such as premiums, co-pays, deductibles and so on. One of the most common ways for employers to keep benefit costs down is to simply lower the benefit levels of their plan offering.
This document outlines specific details, such as a description of the employee benefits that are covered through the plan, participation rules, annual limits, election procedures, eligibility and employer contribution. Section 104(b) of the employee retirement income securities act of 1974 (erisa), the basic law designed to protect the rights of participants and beneficiaries of employee benefit plans, requires that an spd must be distributed to all participants no more than 90 days after an employee becomes a participant or within 120 days of the plan becoming subject to erisa. A participant's beneficiary must also receive the summary plan description within 90 days after becoming eligible for benefits. The spd summarizes specific details of the plan, claim filing procedures, and information concerning plan sponsorship and administration. In addition to distributing it to your employees and their beneficiaries, you must also file it with the department of labor within 120 days of the plan's effective date. Federal legislation requires that section 125 plans can't discriminate as to eligibility and benefits being provided. Failure to meet the nondiscrimination requirements would eliminate the tax-free status of the benefits provided to the highly compensated and/or the key of the best benefits for business owners is that cafeteria plans cost very little to set up and maintain. For most employers, the cost of implementing the plan is recovered through tax savings during the first year--you might even begin saving money as early as the month following the installation of a pop plan.
