The new health care reform rules are changing the way that employers will administer cafeteria plans for their employees’ health care.
Under a SIMPLE cafeteria plan, smaller employers will now be exempt from nondiscrimination testing, but other changes will put limits on Flexible Spending Arrangements and Health Savings Accounts, says Kimberly Flett, CPA, QPA, QKA, associate director at SS&G.
“There are several things that are going to be coming up, but fortunately, there’s still time for employers to prepare, as the bulk of the changes don’t go into effect until 2011,” says Flett.
Smart Business spoke with Flett about the upcoming changes and what employers can do to get ready for them.
Which companies can offer a simple cafeteria plan, and how does the plan work?
To offer a SIMPLE cafeteria plan, an employer must have had fewer than 100 employees in the preceding two years. Once the plan is established, the company will be considered as meeting the requirement even if it employs more than 100 people in subsequent years, in order to encourage employers to continue hiring. However, once an employer has 200 or more employees, it no longer qualifies for the SIMPLE cafeteria plan.
A SIMPLE cafeteria plan should allow for employees to pay their portion of the health, vision, dental and other employer-sponsored welfare premiums on a pretax basis. The employer must also provide a minimum contribution of at least 2 percent of the employee’s compensation, or the lesser of a 200 percent matching contribution or 6 percent of the employee’s compensation.
What are the benefits of offering a SIMPLE cafeteria plan?
If an employer offers such a plan, the plan is deemed to pass discrimination testing. In discrimination testing, highly paid executives and other key employees’ (as defined by regulations) benefits in the plan are tested in comparison to other employees who are contributing to the plan. If the plan does not pass certain threshold tests and the plan fails, benefits are refunded as necessary to the HCE/Key employees and they become taxable to them.
For companies that have a lot of higher-level employees, such as a physicians’ practice or a law firm, making the commitment to a SIMPLE cafeteria plan can allow key employees and executives to maximize their benefits by freeing them from discrimination testing.
Another incentive to employers is the savings on payroll taxes. In addition, because the IRS may provide its own checklist in order to implement these plans, employers will save on plan document costs as well.
One drawback, however, is that employers have to make that minimum employer contribution, which means putting more dollars into the plan, but with executives or key employees and discrimination testing issues, it may be worth the investment.
