Cafeteria
Plan Nondiscrimination Rules
Cafeteria plans are
generally subject to the nondiscrimination requirements of Internal Revenue
Code section 125. To satisfy the section 125
nondiscrimination requirements, a plan generally must satisfy three tests:
- Eligibility
Test: The
plan may not discriminate in favor of highly compensated individuals as to
eligibility to participate; and
- Benefits
and Contributions Test: The plan may not discriminate
in favor of highly
compensated participants as to benefits and contributions; and
- Key
Employee Concentration Test: The nontaxable benefits
provided to key
employees may not exceed 25% of the nontaxable benefits provided for
all employees under the cafeteria plan.
Safe
harbors for satisfying these nondiscrimination tests exist for simple
cafeteria plans and premium-only plans (POPs) meeting specific requirements.
For more information on the safe harbor for POPs, read the 2007 proposed
cafeteria plan regulations, which employers may rely on for guidance pending the
issuance of final regulations.