J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line

Cafeteria Plans

A cafeteria plan is a written plan that allows your employees to choose to receive cash or taxable benefits instead of certain tax-free benefits. If an employee chooses to receive a tax-free benefit under the plan, the fact that the employee could have received cash or a taxable benefit instead will not make the tax-free benefit taxable. The plan must be set up and operated on a nondiscriminatory basis; complicated testing rules apply.

Benefits allowed to be offered under a cafeteria plan:

• Health and accident insurance
• Adoption assistance
• Dependent care assistance
• Group-term life insurance
• Health savings accounts

Benefits not allowed to be offered under a cafeteria plan:

• Educational assistance
• Meals and lodging
• Moving expense reimbursements
• Transportation (commuting) benefits

Simple Cafeteria Plans

Small employers can offer cafeteria plans without any complicated testing rules to ensure that the plans are nondiscriminatory. A small employer is one with 100 or fewer employees. However, once a plan is established, it can continue as a simple cafeteria plan until there are 200 employees.

What distinguishes the simple cafeteria plan from a regular cafeteria plan is mandatory employer contributions. These must be made regardless of whether employees make salary reduction contributions to the plan.

There are 2 contribution formulas that an employer can choose to use:

1. A uniform percentage (not less than 2%) of the employee’s compensation, or

2. An amount not less ...