Senate bill would create simple cafeteria plans for small employers

Small employers aren’t always able to offer the same employee benefits that larger employers can. One such benefit is a cafeteria plan. The Senate health care reform bill (H.R. 3950) would create a new vehicle called a simple cafeteria plan, which would make it easier for small employers to provide tax-free benefits to employees.

What’s a cafeteria plan? Your first thought when you hear the term “cafeteria plan” might be about food and those mysterious items they serve for lunch in grade school. But that’s not the cafeteria we are talking about when it comes to employee benefits.

A cafeteria plan is a written benefit plan maintained by an employer under which all participants are employees and each participant has the opportunity to select the particular benefits that he or she desires among a range of offered benefits. Under a cafeteria plan, employees may choose among two or more benefits consisting of cash (a taxable benefit) and qualified nontaxable benefits. A common qualified nontaxable benefit is coverage under an accident or health plan.

A cafeteria plan can be funded by employer or employee contributions or a combination of both. Employee contributions for qualified benefits under a cafeteria plan generally are made on a pre-tax basis through salary reduction.

What are the rules? Cafeteria plans are subject to various rules, including what’s called “nondiscrimination rules.” Generally, this means that a plan may not discriminate in favor of highly compensated individuals as to eligibility for the plan or as to contributions and benefits.

What’s the new plan? The Senate bill would provide for a “safe harbor” from the nondiscrimination requirements for cafeteria plans for small employers. The safe harbor would require that the cafeteria plan satisfy minimum eligibility and participation requirements and minimum contribution requirements.

Definition of small employer. Employers that would be eligible for the simple cafeteria plan would be those that employed an average of 100 or fewer employees on business days during either of the two preceding years.

Eligibility and participation. The Senate bill’s eligibility and participation requirements for a simple cafeteria plan are met if:

(1) all employees who had at least 1,000 hours of service for the preceding plan year are eligible to participate, and

(2) 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.

Contributions. The contribution requirements are met if the employer is required, without regard to whether a qualified employee makes any salary reduction contribution, to make a contribution to provide qualified benefits under the plan on behalf of each qualified employee in an amount equal to:

(1) a uniform percentage (not less than 2 percent) of the employee’s compensation for the plan year, or

(2) an amount which is not less than the lesser of—

(a) six percent of the employee’s compensation for the plan year, or

(b) twice the amount of the salary reduction contributions of each qualified employee.