BROKER WORLD MAGAZINE
JANET
LeTOURNEAU
QPA, CFCI, is the compliance
manager at WageWorks. She
draws upon more than 20 years
of experience with flexible benefits plans and tax laws to perform
consulting services and monitor
quality control.
LeTourneau is a frequent
speaker to employer groups and
conferences and is on the board
of directors and a member of the
technical advisory committee
for the Employers Council on
Flexible Compensation (ECFC).
She is the lead instructor for the
Section 125 administrators training workshop.
LeTourneau was one of the
first people in the country to earn
the CFCI designation sponsored
by the ECFC. She is a certified
trainer in the Certified in Flexible
Compensation Instructor (CFCI)
program.
LeTourneau can be reached
at WageWorks, 4200 West 115
Street, Suite 300, Leawood, KS
66211. Telephone: 913-4984157. Email: Jan.LeTourneau@
wageworks.com.
Check Out
SIMPLE
Cafeteria Plans
A
mong the myriad changes included in
The Affordable Care Act provisions
was a plan design for SIMPLE cafeteria
plans. As the name implies, this type of
cafeteria plan is supposed to be simple for
employers to establish and maintain.
Employers can skip all the applicable
nondiscrimination testing requirements
associated with today’s cafeteria plans,
assuming they meet certain eligibility
requirements, pass the SIMPLE plan’s eligibility and participation requirements, and
provide a required contribution.
First I’ll discuss what constitutes an
eligible employer and then move on to the
eligibility, participation and contribution
requirements. Then, as we go through some
examples, you may see how employers can
provide additional non-taxable benefits
to their owners and highly compensated
employees. This twist may make a SIMPLE
plan a snap for some of your employers.
Let’s look at the facts.
Eligible Employers
SIMPLE plans are for “small” employers—those with 100 or fewer employees
during either of the two preceding years.
If an employer has not been in existence
for two years, calculations are based on the
average number of employees reasonably
expected to be employed on business days
in the current year.
An employer must count employees
under common ownership rules, parttime and seasonal employees, and leased
employees.
Reprinted from BROKER WORLD October 2010
Used with permission from Insurance Publications Eligible employers that grow beyond
100 employees can retain their eligibility
to maintain a plan until they employ an
average of 200 or more employees on business days during the year. Yet that doesn’t
mean they have to abandon their SIMPLE
plan in the middle of a plan year—they may
complete the current plan year. Then they
must go to a regular cafeteria plan—with
non-discrimination testing—starting with
the subsequent plan year.
Although regulations prohibit a sole proprietor, partner in a partnership, member of
an LLC (in most cases), or individuals owning more than 2 percent of an S corporation
from participating in a cafeteria plan , they
may still sponsor a SIMPLE plan. These
“owner/employees” still benefit from
the savings on payroll taxes and in some
cases, workers’ compensation premiums,
plus they may have key or highly compensated employees who can benefit from
a SIMPLE plan. Shareholders of regular C
corporations may participate in the SIMPLE
cafeteria plan.
Eligibility and Participation Rule
All employees with at least 1,000 hours
of service for the preceding year must be
allowed to participate in a SIMPLE plan,
and each eligible employee must have the
right to elect any benefit offered under the
plan.
Employees who may be omitted from
participating in the plan are those under
the age of 21, with less than one year of
service, covered by a collective bargain-
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ing agreement, or working outside of the
United States as nonresident aliens.
Required Contributions
Required contributions can be delivered
through the plan by one of three methods:
a An amount equal to a uniform percentage of not less than 2 percent of an
employee’s compensation for the plan year.
This amount is made available to all eligible
employees, even if they do not make salary
redirections.
Or the lesser of:
a Six percent of employee’s compensation to those making salary redirections to
the plan, or
a Twice the amount of an employee’s
salary reductions.
Employer contributions must be available to be used for any qualified benefit
offered through the plan, but cash need
not be offered for these required employer
contributions. The employer contributions
cannot be made to highly compensated or
key employees at a greater rate than to the
rank and file employees.
Nondiscrimination Tests
What does all this “buy” the employer?
In addition to some serious payroll tax
savings, there’s no more complicated and
confusing nondiscrimination testing associated with offering a cafeteria plan.
The tests avoided include four for health
care flexible spending accounts (FSA) and
four for dependent care accounts; plus
the cafeteria plan code section carries
another three that employers are obliged
to complete and pass every plan year. The
employer may also have to make adjustments to elections if one or more nondiscrimination test fails.
Two of the tests that are failed more often
than any others are the dependent care 55
percent concentration test and the overall 25
percent concentration test that includes all
benefits included in the cafeteria plan.
Let’s work through one example to see
how the 25 percent concentration test works
and how the implementation of a SIMPLE
cafeteria plan can benefit owners and highly
compensated employees.
Table 1
Contribution Options
2 percent 6 percent
Compen-
Employer Compen- Compen- 2 times
sation
Election Savings
sation
sation
Election
2 Owners
$200,000
$3,000
$ 4,000
$12,000
$ 6,000
3 NHCs
$135,000
$4,500
$ 2,700
$ 8,100
$ 9,000
6 NHCs
$270,000
$ 5,400
Total
$605,000
$12,100
$20,100
$15,000
$ 8,100
$ 8,100
$ 9,000
$7,500
$138
$138
Net Costs
In the example below there are two owners and nine other employees. The owners
elect $1,500 each, three non-highly compensated (NHC) employees elect $1,500 each,
and six NHC employees do not elect any
salary reduction to the plan.
This scenario would not pass the 25 percent concentration test ($3,000 divided by
$7,500 equals 40 percent of the total benefits
going to key employees). In order to pass,
the owners would have to reduce their election to $750 each.
By establishing a SIMPLE cafeteria plan,
the employer would not have to perform
any discrimination tests and the owners could take advantage of substantial
employer contributions.
Table 1 illustrates the contribution
options this employer may pursue:
1. Provide employer contributions to the
SIMPLE plan equal to 2 percent of compensation to all eligible employees.
a. The owners are given $4,000 to
spend on benefits.
b. All other employees are given
$8,100 for benefits.
2. Using the matching method of providing employer contributions equal to 6
percent of compensation to participating
employees.
a. The owners are given $12,000 for
benefits.
b. All participating employees are
given $8,100 for benefits.
3. Employer contributions can be provided as a match equal to twice the sal-
Reprinted from BROKER WORLD October 2010
Used with permission from Insurance Publications ary reduction amounts by participating
employees, but only to the extent that this is
less than the previous matching method.
a. The owners are given $6,000 for
benefits.
b. All participating employees are
given $9,000.
In this example the employer could
choose between contributing 2 percent
of compensation to a SIMPLE plan for
the benefit of all eligible employees or
contributing an amount equal to twice the
salary reduction amounts to participating
employees.
And don’t forget—if participants don’t
spend all their money, it can be forfeited
back to the employer to offset administrative expenses. By forfeiting unused contributions, the employer’s net costs could be
reduced further.
It’s All in the Numbers
For small or family-owned businesses,
a SIMPLE cafeteria plan may be just the
ticket to maximize benefits to key and
highly compensated employees. For larger
companies, it may make sense to establish
a SIMPLE plan in order to pass all the
nondiscrimination tests and preserve nontaxable benefits to their key and highly
compensated employees. ˛
The information contained in this article is not
intended to be legal, accounting, or other professional
advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to
specific situations.
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