Small employers can skip cafeteria plan testing by following five fixed rules.
A simple cafeteria plan lets an eligible small employer meet the cafeteria plan nondiscrimination requirements through set rules on eligibility, participation and employer contribution. This guide maps those rules.
Five Rules Behind The Safe Harbor.
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.
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.
Outgrowing The Size Limit
How the 200-employee growth rule lets a plan continue, and what replaces the safe harbor afterward.
How A Small Employer Adopts One.
Adoption follows a short sequence. Confirm the headcount test, choose one of the two employer contribution formulas, write the eligibility rules and exclusions into a plan document, and put the yearly headcount check on the calendar.
The trade is cost certainty for testing risk. The employer commits to a contribution for qualified employees and, in exchange, the plan no longer depends on how highly paid employees happen to elect in a given year.
The safe harbor is all or nothing for the year. If one rule is missed, the plan returns to the general tests. The five guides above take each rule on its own, and the size test comes first because everything else depends on it.
Other Cafeteria Plan Topics.
Section 125 Election Changes
When employees may change elections mid-year.
Dependent Care FSA Guide
A benefit commonly offered through a cafeteria plan.
FSA And HRA Administration
How flexible spending accounts are run.
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.
Highly Compensated Employee, 26 U.S.C. 414(q) — The definition the simple plan rules borrow.
Key Employee, 26 U.S.C. 416(i) — The officer and owner tests that define a key employee.
Quick Answers.
Direct answers on how the safe harbor works, each tied to a fuller guide.
Does a simple plan replace annual nondiscrimination testing?
For a year in which an eligible employer’s simple plan meets the eligibility, participation and contribution rules, the statute treats the plan as meeting the cafeteria plan nondiscrimination requirements, along with certain benefit-level tests, for that year. A year in which any rule is missed falls back to the ordinary tests.
Is a simple plan a separate kind of cafeteria plan?
It uses the same mechanism, in which employees choose between cash and qualified benefits, and differs only in how it satisfies the nondiscrimination requirements. It is still a written plan.
Can highly paid employees take part?
Yes, if they meet the eligibility rules, and they must be offered the same benefit elections as everyone else. The required employer contribution is measured for qualified employees, who are neither highly compensated nor key employees, and a match rate for highly compensated or key employees cannot exceed the rate for others.
What size makes an employer eligible?
An average of 100 or fewer employees on business days in either of the two preceding years, with a forward-looking test for a business that did not exist for the whole prior year. Once a plan is adopted, eligibility generally continues until the year after the employer averages 200 or more employees.
Which sources should we read first?
Start with subsection (j) of section 125 of the Internal Revenue Code and the simple cafeteria plan section of IRS Publication 15-B. Both are linked in the sources section of this page.
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