The simple plan route opens only to employers under a set size.
Before any other rule matters, an employer has to show it is small enough. This guide explains how the headcount test works and where employers most often miscount.
Where This Rule Sits.
General information, not legal or tax advice. Statutes and IRS guidance change, so read the current text and check the details with your own counsel or tax advisor.
Simple Cafeteria Plans Overview
The full map of the safe harbor and the five rules behind it.
Cafeteria Plan Nondiscrimination Testing
The ordinary tests an employer falls back on when it does not qualify.
Outgrowing The Size Limit
How the test changes once headcount climbs.
Counting The Headcount.
The size test looks backward. An employer is eligible for a year when it averaged 100 or fewer employees on business days during either of the two preceding years. Because either year can carry the test, a company that grew past 100 last year can still qualify if the year before stayed at or below the line.
Younger companies get a forward-looking version. A business that did not exist for the whole of the preceding year qualifies if it reasonably expects to average 100 or fewer employees in the current year. Keep a dated record of what that expectation rested on, such as a hiring plan or signed offers.
An average matters more than any single day. Seasonal hiring, a temporary project or a mid-year acquisition can push one pay period past 100 without moving the annual figure. The statute asks for the average across business days, so build the count from the full year rather than a snapshot.
Related employers are not counted one at a time. The statute carries aggregation and predecessor rules, which means an owner with several entities, or a business that absorbed another, should not simply count the entity that sponsors the plan.
Setting It Up.
Pull headcount for each of the two preceding years, by business day, and calculate the average for each year.
Write down which year you are relying on and keep the worksheet with the plan records.
List every related entity and any predecessor, then decide with counsel whether their employees belong in the count.
Repeat the count before each renewal, because eligibility is tested year by year and not once.
Mistakes To Avoid.
Counting only the plan sponsor when affiliated companies share ownership. Treating a count made at adoption as permanent. Using a payroll snapshot in place of a daily average.
Assuming the size test is the whole story. An eligible employer must still meet the eligibility and participation rules and the contribution rule before the plan is treated as passing for the year.
Laws And Sources
Cafeteria Plans, 26 U.S.C. 125 — Subsection (j) sets the simple cafeteria plan rules; subsections (f) and (i) cover qualified benefits and the health FSA cap.
IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits — The IRS summary of simple cafeteria plans for small businesses, including the cafeteria plan written-plan description.
Simple Cafeteria Plans, 26 U.S.C. 125(j) — Paragraph (5) defines the eligible employer, including the 100-employee test and the rule for employers that grow past it.
Controlled Groups And Affiliated Service Groups, 26 U.S.C. 414 — Subsections (b), (c), (m) and (o) treat related businesses as one employer.
Special Rules For Related Employers, 26 U.S.C. 52 — Subsections (a) and (b) aggregate employers under common control, a rule that section 125(j)(5) borrows.
Quick Answers.
Short answers to the questions we hear most on this rule.
Do we need to repeat the size test every year?
Yes. Eligibility is determined for each year using the two preceding years, so an employer that qualified last year confirms it again for the next one, unless the growth rule for an existing plan applies.
What if the business started this year?
A business that was not in existence for the full preceding year qualifies if it reasonably expects to average 100 or fewer employees in the current year. Keep the hiring plan that supports the expectation.
Do we count only our own staff if a sister company exists?
Not necessarily. The statute includes aggregation and predecessor rules, so related employers may have to be combined. Have counsel review the ownership structure before relying on one entity’s count.
More Guides In This Series.
Eligibility And Participation
Who must be allowed in, which groups an employer may leave out, and the equal-choice rule for benefit elections.
Minimum Employer Contribution
The 2 percent flat contribution, the matching alternative capped at 6 percent, and a worked pay example.
Permitted Benefits And Plan Document
Which benefits belong on the menu, which are off limits, and what the written plan should say.
Outgrowing The Size Limit
How the 200-employee growth rule lets a plan continue, and what replaces the safe harbor afterward.
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