Posted on February 27th, 2014

One way to keep your employees happy and not have them going elsewhere is to start a cafeteria plan where their benefits become non taxable. Consider the  following:

Small Employers May Establish “Simple Cafeteria Plans”

Under a cafeteria plan, an employer may offer a menu of nontaxable benefits and cash (or certain other taxable benefits) from which participating employees may select. The value of nontaxable qualified benefits that a participant elects to receive is not includible in his income. However, under requirements that plans not discriminate in favor of highly compensated participants or key employees, plan benefits received by these individuals under a discriminatory cafeteria plan are includible in their income.

New law. For years beginning after Dec. 31, 2010, small employers may provide employees with a “simple cafeteria plan. Under such a plan, an eligible small employer is provided with a safe harbor from the nondiscrimination requirements for cafeteria plans as well as from the nondiscrimination requirements for specified qualified benefits offered under a cafeteria plan, including group term life insurance, benefits under a self-insured medical expense reimbursement plan, and benefits under a dependent care assistance program.

 An eligible employer (with 100 or fewer employees, see below) that maintains a simple cafeteria plan with respect to which the requirements described below are met for any year, is treated as meeting any applicable nondiscrimination requirement during the year. For these purposes, a “simple cafeteria plan” is a cafeteria plan that: (1) is established and maintained by an eligible employer, (2) meets prescribed contribution requirements, and (3) meets prescribed eligibility and participation requirements.

To create a simple cafeteria plan, the employer must make a contribution to provide qualified benefits under the plan on behalf of each qualified employee (without regard to whether a qualified employee makes any salary reduction contribution) in an amount equal to:

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

(ii) an amount which is not less than the lesser of (I) 6% of the employee’s compensation for the plan year, or (II) twice the amount of the salary reduction contributions of each qualified employee.

 A salary reduction contribution” means, with respect to a cafeteria plan, any amount which is contributed to the plan at the election of the employee and which is not includible in gross income under the simple cafeteria plan rules.

The requirements described in item (ii), above, are not treated as met if, under the plan, the rate of contributions with respect to any salary reduction contribution of a highly compensated or key employee, at any rate of contribution, is greater than the rate for an employee who is not a highly compensated or key employee. However, an employer may otherwise make contributions to provide qualified benefits under the plan in addition to the required contributions described above. For purposes of the contribution requirements, a “qualified employee” is, with respect to a cafeteria plan, any employee who is not a “highly compensated employee” or a “key employee,” and who is eligible to participate in the plan. The minimum eligibility and participation requirements to be a simple cafeteria plan are met for any year if, under the plan, (a) all employees who had at least 1,000 hours of service for the preceding plan year are eligible to participate, and (b) 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.

 However, an employer may elect to exclude under the plan employees:

(1) who have not attained the age of 21 before the close of a plan year,

(2) who have less than one year of service with the employer as of any day during the plan year,

(3) who are covered under an agreement which the Secretary of Labor finds to be a collective bargaining agreement, if there is evidence that the benefits covered under the cafeteria plan were the subject of good faith bargaining between employee representatives and the employer, or

For purposes of items (1) and (2) above, a plan may provide a shorter period of service or younger age. For purposes of the simple cafeteria plan rules, an “eligible employer” is, with respect to any year, any employer that employed an average of 100 or fewer employees on business days during either of the two preceding years. For these purposes, a year may only be taken into account if the employer was in existence throughout the year. If an employer was not in existence throughout the preceding year, the determination is based on the average number of employees that it is reasonably expected the employer will employ on business days in the current year. If (a) an employer was an eligible employer for any year (a “qualified year”), and (b) the employer established a simple cafeteria plan for its employees for that year, then, notwithstanding the fact the employer fails to meet the “eligible employer” requirements described above for any later year, the employer will be treated as an eligible employer for that later year with respect to employees (whether or not employees during a qualified year) of any trade or business which was covered by the plan during any qualified year. However, this rule won’t apply if the employer employs an average of 200 or more employees on business days during any year preceding any such later year.