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"SIMPLE" Cafeteria Plans


Belgarath
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Curious as to thoughts on this. I don't think I've actually seen anyone utilizing one. Any thoughts on why? Is it that the 2% employer contribution is a major sticking point, or are there other reasons? Seems like it would work well for many really small employers, if it isn't the required employer contribution that's the problem. Thanks for any thoughts.

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I think because the only cafeteria plan nondiscrimination test employers have a realistic chance of failing is the 55% average benefits test component of the §129 testing for the dependent care FSA.  The added complication (it's not actually that simple) and funding requirements that come with a Simple plan just aren't worth it for that.  They'll either reduce the HCE dependent care FSA elections as needed or stop offering the dependent care FSA instead.

Whoever lobbied for this provision in the ACA probably just wasn't very familiar with how cafeteria plans typically operate and the FSA TPA industry that largely runs them.  A reform of the 55% average benefits test would have been much more useful. 

I've also never seen an employer actually establish a Simple cafeteria plan.  Probably a very small number actually exist in operation.

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Thanks Brian, I appreciate it. I have very limited involvement with cafeteria plans, but I have seen a number of failures on the 25% key employee test - but this is on very small plans, family businesses, etc. They don't have a TPA and are very surprised when they find out they are subject to testing! And yes, on these small plans, if even one HCE utilizes the DCAP, then it usually fails. Again, my experience is limited, and involves just a very small slice of the possible plans/situations. Some of those people might possibly benefit from the SIMPLE if they were willing to make the employer contribution, but the cost might well exceed the benefit! 

If you don't mind expanding a bit, what other added complications might you encounter with a SIMPLE? Again, just curious - please don't waste your time if it requires any effort!

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Not having actually been involved with one in practice, the main ones that seem problematic to me are:

  1. Properly calculating, communicating, and administering the required employer contributions for each cafeteria plan benefit component; and
  2. Making sure your health FSA employer contributions don't cause it to lose excepted benefit status under the "maximum benefit" rule.

https://www.theabdteam.com/blog/aca-and-hipaa-excepted-benefits/

Common Excepted Benefit #3: Health FSA

Health FSAs must qualify as an excepted benefit to avoid violating the ACA market reform provisions.

The general requirements for a health FSA to be considered an excepted benefit are:

  • The Footprint Rule: All employees eligible for the health FSA must also be eligible for the major medical plan; and
  • The $500 Rule: Employer nonelective contributions to the health FSA cannot exceed $500.

Under the footprint rule, all employees eligible for the health FSA must also be eligible for (regardless of enrollment in) the major medical plan.  In other words, the health FSA eligibility “footprint” cannot be broader than the major medical plan’s eligibility “footprint.”  For more details, see our prior post: The Health FSA Eligibility Footprint Rule.

The $500 rule typically is not an issue because most employers do not make employer contributions to the health FSA.  Those employers that do contribute to the health FSA generally will have to limit that employer health FSA contribution to no more than $500 to preserve the plan’s excepted benefit status.

Employers wishing to contribute in excess of $500 to the health FSA can generally do so only if the structure the employer contribution as a matching contribution.  This is because the health FSA “maximum benefit” rule technically prohibits employers from contributing any amount that exceeds two times the employee’s salary reduction election (or, if greater, $500 plus the employee’s salary reduction election).

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