A cafeteria plan is an employer-sponsored plan that allows employees to choose certain pre-tax benefits or cash. For example, an employee may choose to pay his or her share of premiums for employer-sponsored health insurance before taxes through the plan.
A cafeteria plan must have a written plan document governing the plan and may not discriminate in favor of highly compensated or key employees. To ensure compliance with the nondiscrimination rules, plan sponsors are required to perform several nondiscrimination tests each plan year.
The Patient Protection and Affordable Care Act makes broad changes to the rules and mechanisms affecting certain types of health policies, including significant changes to cafeteria plans and health flexible spending accounts (FSA).
Under the new rules, a sponsor of a “simple cafeteria plan” is not required to perform nondiscrimination testing. Thus, the administrative burden of offering a cafeteria plan is lessened, making it is easier for small employers to offer a cafeteria plan to their employees.
Effective January 1, 2011, certain employers that establish “simple cafeteria plans” are exempt from the Code Section 125 non-discrimination requirements, as well as the non-discrimination requirements applicable to the plans offered through the cafeteria plan (for example, Code Section 129 non-discrimination testing for dependent care FSAs, Code Section 105(h) non-discrimination testing for self-insured medical plans, etc). The act defines a simple cafeteria plan as a plan “which is established and maintained by an eligible employer,” and for which certain contribution, eligibility and participation requirements are met. In general, an eligible employer is an employer that employed an average of 100 or fewer employees for either of the prior two years. Plans that qualify as a simple cafeteria plan for any given year are treated as meeting applicable non-discrimination requirements for that year (that is, non-discrimination testing is not required for these plans).