The Patient Protection and Affordable Care Act, as amended (the "PPACA"), creates a new opportunity for employers to offer a valuable benefit to employees. The PPACA establishes a new "Small Business Cafeteria Plan" for employers with an average of 100 or fewer employees. Cafeteria plans allow employees to elect to reduce their salaries on a pre-tax basis to pay for certain types of expenses, such as dependent care (day care), certain types of medicines, and health insurance premiums, co-payments, and deductibles. Thus, by participating in a cafeteria plan, individuals can pay for certain expenses using pre-tax dollars, thus reducing their overall tax liability.
Cafeteria plans that are not "Small Business Cafeteria Plans" must satisfy certain nondiscrimination requirements. Cafeteria plans are subject to nondiscrimination requirements to prevent discrimination in favor of highly compensated individuals and key employees. A failure to satisfy the nondiscrimination rules generally results in a loss of the exclusion from gross income of the amounts contributed to the cafeteria plan. Thus, if the plan is discriminatory, certain plan participants may be required to include the amount of their cafeteria plan contributions in their gross income and pay taxes on that amount.
The PPACA creates a new "Small Business Cafeteria Plan" that provides a safe harbor from the nondiscrimination requirements for cafeteria plans. Under the safe harbor, a cafeteria plan is treated as meeting the nondiscrimination rules if the cafeteria plan satisfies minimum eligibility, participation, and contribution requirements.
The eligibility requirement is met only if all employees (other than excludable employees) are eligible to participate, and each employee eligible to participate is able to elect any benefit available under the plan. A plan may exclude employees who (1) have not attained the age of 21 (or a younger age provided in the plan) before the close of a plan year, (2) have fewer than 1,000 hours of service for the preceding plan year, (3) have not completed one year of service with the employer as of any day during the plan year, (4) are covered under an agreement that 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 (5) are certain nonresident aliens working outside the United States. An employer may have a shorter age and service requirement but only if such shorter service or younger age applies to all employees.
The minimum contribution requirement is met if the employer provides a minimum contribution for each nonhighly compensated employee or a key employee in addition to any salary reduction contributions the employee makes. The minimum contribution is permitted to be calculated under two different methods, but the same method must be used for calculating the minimum contribution for all nonhighly compensated employees. The minimum contribution under the nonelective contribution method is an amount equal to a uniform percentage (not less than two percent) of each eligible employee's compensation for the plan year, determined without regard to whether the employee makes any salary reduction contribution under the cafeteria plan. The minimum matching contribution method is the lesser of 100 percent of the amount of the salary reduction contribution elected to be made by the employee for the plan year or (2) six percent of the employee's compensation for the plan year. A simple cafeteria plan is permitted to provide for matching contributions in addition to the minimum required but only if matching contributions with respect to salary reduction contributions for any highly compensated employee or key employee are not made at a greater rate than the matching contributions for any nonhighly compensated employee.
The "Small Business Cafeteria Plan" is available beginning January 1, 2011.
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