FLEXFLASH
Check Out SIMPLE Cafeteria Plans
Among the myriad of 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 Employer
SIMPLE plans are for “small” employers. This is an employer who employed 100 or fewer employees
during either of the two preceding years. If the employer has not been in existence for two years, they
base their calculations 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, part-time and seasonal
employees, and leased employees.
Eligible employers that grow to more than 100 employees can retain their eligibility to maintain the
plan until they employ an average of 200 or more employees on business days during the year. That
doesn’t mean they have to abandon their SIMPLE plan in the middle of a plan year. They can finish
out the current plan year, but then must revert to a regular cafeteria plan – with nondiscrimination
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% 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. Also, these types of entities may
have key or highly-compensated employees that can benefit from a SIMPLE plan. Shareholders of
regular C Corporations may participate in the SIMPLE cafeteria plan.
Eligibility and Participation Rule
The SIMPLE plan must allow all employees with at least 1,000 hours of service for the preceding year
to participate in the plan and each eligible employee must have the right to elect any benefit offered
under the plan.
Helpful Links . . .
There are some employees that may be omitted from participating in the plan. Those that are under
the age of 21, less than one year of service, covered by a collective bargaining agreement,
or nonresident aliens working outside of the United States.
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Required Contributions
The information contained in this
article is not intended to be legal,
accounting, or other professional
advice. We assume no liabilit y
whatsoever in connection with its
use, nor are these comments directed
to specific situations.
Required contributions can be delivered through the plan by one of three methods:
1. Provide an amount equal to a uniform percentage of not less than 2% of the
employees’ compensation for the plan year. This amount is made available to
all eligible employees, even if they do not make any salary redirection.
Or the lesser of:
2. Contribute 6% of employees’ compensation to those making salary reductions
to the plan, or
3. Contribute twice the amount of the employees’ salary reductions.
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FLEXFLASH
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.
Non-Discrimination 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 tests for the health care flexible spending account (FSA) and four tests
for the dependent care account; plus the cafeteria plan code section carries another three tests 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% Concentration
Test and the overall 25% Concentration Test that includes all benefits included in the cafeteria
plan. Let’s work through one example to see how the 25% Concentration Test works and how the
implementation of a SIMPLE cafeteria plan can benefit owners and highly-compensated employees.
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% Concentration Test. $3,000 divided by $7,500 equals 40% 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.
The chart below illustrates the contribution options this employer may pursue:
1. Provide employer contributions to the SIMPLE plan equal to 2% 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% 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 salary
reduction amounts by participating employees, but only to the extent that
this is less than the previous matching method.
Helpful Links . . .
a. The owners are given $6,000 for benefits.
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b. All participating employees are given $9,000
Compensation Election
Two Owners
$200,000
$3,000
Three NHCs
$135,000
$4,500
Six NHCs
$270,000
Total
$605,000
Net Costs
2%
6%
ER Savings
Compensation Compensation
$138
2x
Election
$4,000
$12,000
$6,000
$2,700
$8,100
$9,000
$12,100
$20,100
$15,000
$8,100
$8,100
$9,000
$5,400
$7,500
$138
Flex-tech Links on the Web
The information contained in this
article is not intended to be legal,
accounting, or other professional
advice. We assume no liabilit y
whatsoever in connection with its
use, nor are these comments directed
to specific situations.
Copyright 2010 MHM Resources LLC
Page 2 of 3
MHM_3839_FF (Oct 2010)
FLEXFLASH
In the above example the employer could choose between contributing 2% of compensation to the
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 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 non-taxable benefits to their
key and highly compensated employees.
Helpful Links . . .
mhmResources.com
Flex-tech Links on the Web
The information contained in this
article is not intended to be legal,
accounting, or other professional
advice. We assume no liabilit y
whatsoever in connection with its
use, nor are these comments directed
to specific situations.
Copyright 2010 MHM Resources LLC
Page 3 of 3
MHM_3839_FF (Oct 2010)