Thursday, December 9, 2010

Health reform allows for simple cafeteria plans for small employers

The Patient Protection and Affordable Care Act (PPACA) modified cafeteria plan regulations to allow “simple cafeteria plans” for employers with 100 employees or less, effective for plan years beginning after December 31, 2010. Prior to passage of PPACA, IRS rules governing cafeteria plans did not include self-employed individuals in the definition of “employee.” As such, sole proprietors, partners, shareholders of 2% or more in S-corporations and members of limited liability companies were unable to participate in cafeteria plans.

With simple cafeteria plans, owners of small businesses may now participate as individuals, making it more likely they will offer these plans to their employees. The new law has created a “safe harbor” for qualified small employers from certain nondiscrimination requirements applicable to cafeteria plans as long as certain eligibility, participation and minimum contribution requirements are met.

Eligibility Requirements
• Employers who averaged 100 or fewer employees in the previous 2 years can qualify for a simple cafeteria plan
• Companies not in existence for the previous 2 years must reasonably expect to average 100 or fewer employees during the current year
• Once an employer meets this eligibility requirement and establishes a simple cafeteria plan for any year, it will continue to be treated as an eligible employer for subsequent years until the year after the first year it averages 200 employees or more
• Aggregation rules are used to prevent the employer from creating additional subsidiaries to avoid the limitation on the number of employees

Participation Requirements
• Employees who worked at least 1,000 hours in the previous year must be eligible to participate
• Every eligible employee must have the ability to elect any benefit available under the plan
• Employees under age 21, employees with less than one year of service with the company, employees covered under a collective bargaining agreement and nonresident aliens working outside the US may be excluded from participating

Contribution Requirements
To establish a cafeteria plan, employers must make a contribution for every qualified employee, whether or not the employee makes a salary deferral to the plan. A “qualified employee” includes any employee who is eligible to participate in the plan and who is not a highly compensated employee or a key employee.

The contribution amount must be determined based on one of the following:
• A uniform percentage that is at least 2% of the employee’s compensation; or
• An amount 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.

If the employer relies on the satisfaction of (b), it cannot contribute to highly compensated employees or key employees at a rate greater than the matching contribution it provides to all other employees. The employer must also use the same method to calculate the minimum contribution for all non-highly compensated employees.

Safe Harbor from Nondiscrimination Testing
Once an employer meets the contribution and eligibility requirements above, the plan is treated as meeting the following nondiscrimination tests, as applicable:
• The eligibility test in Code Section 125(b)(1)(A)
• The contributions and benefits test in Code Section 125(b)(1)(B)
• The key employee concentration test in Code Section 125(b)(2)
• The nondiscrimination requirements for group term life insurance in IRS Section 79(d)
• The requirements for self-insured medical expense reimbursement plans in IRS Section 105(h)
• The dependent care assistance requirements in IRS Section 129(d) paragraphs (2), (3), (4) and (8)

Further guidance is needed to determine whether the safe harbor also applies to the health reform requirement that fully insured group health plans must now comply with Code Section 105(h)(2) requirements.

For more information, click to access our Legislative Brief on Simple Cafeteria Plans. We suggest employers consult with their tax advisor before establishing a simple cafeteria plan.

No comments:

Post a Comment