Cafeteria Plan Design

[Guest elainem]

We have a client who would like to set up a cafeteria plan for it's employees. They are a C-Corp with only 2 employees. Both employees are owners. Can we set up the plan for them even though there are no other non-key employees? Do we have to perform testing since there are no other non-key employees?

[Guest b2kates]

why?

as the owners and only employees in a C corp, they may receive all the benefits income

tax free.

why go to the effort and create the issues involved with a cafeteria plan.

[GBurns]

A cafeteria plan is not the health insurance plan nor any other benefit.

A cafeteria plan is only relevant where there is an employee contribution. Since, at this time, there are only employee/owners who will be covered, the need for an employee contribution would serve no purpose, therefore no need for a cafeteria plan.

Why do you think that a cafeteria plan is needed?

[E as in ERISA]

Wouldn't a cafeteria plan make sense where they want different levels of benefits? E.g., if they are 50/50 owners but one wants family health coverage and the other wants single -- with different price tags. If the employer pays all, then they may be messing with the 50/50 split. And technically they shouldn't be adjusting salaries to make up for that difference -- because then they are actually doing salary reductions -- without a plan. By using a cafeteria plan, then they can each purchase what they want....

[SLuskin]

Both are key employees. This plan would never pass the 25% concentration test. I am sure that these owner/employees take part of their income as salary and part as distribution. They can have their attorney or accountant help them to make sure that it all comes out even in the end. This company is not a prospect for a Cafeteria Plan.