Growing past 100 does not end the safe harbor right away.
The 100-employee line is an entry test. Staying in is governed by a second, higher line, and planning for it early avoids a surprise at testing time.
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.
Eligible Employer Size Test
How the entry headcount is calculated.
Cafeteria Plan Nondiscrimination Testing
What applies once the safe harbor is gone.
How The Growth Rule Works.
An employer that adopted a simple plan while it was under the size line stays an eligible employer as it grows. IRS Publication 15-B puts the end point at the year after the employer averages 200 or more employees.
Take an employer that averages 90 employees, adopts the plan, then averages 130 and later 170. It remains eligible in each of those years. If it averages 205 employees in one year, the following year is the first in which it is no longer an eligible employer.
The rule speaks to an employer that adopted the plan while small. As the IRS describes it, it is a way to keep a plan through growth, not a route in for a company that was already large.
Once eligibility ends, the plan loses the safe harbor and has to pass the ordinary cafeteria plan nondiscrimination tests. Those tests compare benefits and contributions across highly compensated, key and other employees, and our testing guide explains what is measured.
Planning For Growth.
Track the annual average headcount in the same place every year, so the trend is visible well before 200.
Ask the plan administrator to run a trial test one year ahead, using current elections, so any gap is known early.
Decide with counsel, ahead of time, what the plan will look like in its first year without the safe harbor, including whether the employer contribution continues.
Mistakes To Avoid.
Waiting for the first tested year to find out the plan fails. Overlooking an acquisition that adds employees through the aggregation and predecessor rules. Treating the first year over 200 as the first year without the safe harbor, when the lag runs a 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.
At what size does the safe harbor end?
The IRS describes eligibility as continuing until the year after the employer averages 200 or more employees. One hundred is the entry line, and 200 is where continued eligibility ends.
Does an acquisition affect the count?
It can. The statute carries aggregation and predecessor rules, so employees of a related or acquired business may be counted, which can lift the average faster than hiring alone. Have counsel review the structure before closing.
What applies after eligibility ends?
The ordinary cafeteria plan nondiscrimination tests, which compare benefits and contributions across highly compensated, key and other employees. Our testing guide explains what is tested.
More Guides In This Series.
Eligible Employer Size Test
The average-headcount test, how younger companies are measured, and why related entities may be counted together.
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.
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