The health care reform law allows eligible small employers to establish a new type of cafeteria plan-called a “simple cafeteria plan”-effective for years beginning after December 31, 2010. These plans will be treated as meeting the nondiscrimination rules for cafeteria plans and most (but not all) component benefits (e.g., health FSAs and DCAPs, but not adoption assistance), so long as specified contribution, eligibility, and participation requirements are met. In general, only employers with an average of 100 or fewer employees during either of the preceding two years may establish a simple cafeteria plan. Special rules address application of the rule to new employers and permit growing employers to continue benefiting from the relief until they employ an average of 200 or more employees. The simple cafeteria plan provisions are set forth in Code § 125(j), as amended by the health care reform law. To date, the IRS has not issued regulations or other official guidance regarding simple cafeteria plans.

Simple Cafeteria Plans in a Nutshell

Here are the basic requirements that must be satisfied under the simple cafeteria plan rules:

  • Employer size. The employer (including certain affiliated entities) must have employed an average of 100 or fewer employees in either of the two preceding years. Special rules apply to new employers and certain growing employers with fewer than 200 employees.
  • Eligibility. In general, all employees with at least 1,000 hours of service during the preceding plan year (other than certain excludable employees) must be eligible to participate in the plan. Each employee who is eligible to participate must be able to elect any benefit available under the plan (subject to any terms and conditions that apply to all participants).
  • Required employer contributions. Employees who are not key employees or highly compensated must receive employer contributions of at least (1) 2% of the employee’s compensation for the plan year, or (2) the lesser of 6% of the employee’s compensation for the plan year or twice the employee’s salary reductions.