Compliance FAQ

An employee who is more-than-a-2% shareholder in an S corporation on any day during the taxable year cannot participate in a cafeteria plan or a health reimbursement arrangement maintained by the S corporation.

Code S 125 permits employers and participants to enjoy tax advantages through the use of a cafeteria plan (a.k.a. Pretax Premium Plan, PTP Plan, Premium Plan, POP Plan). A cafeteria plan may also include health care expense reimbursement accounts, dependent care expense reimbursement accounts, or health savings accounts contributions. However, tax advantages are conditioned on the cafeteria plan's meeting nondiscrimination requirements. If a cafeteria plan discriminates in favor of highly compensate participants, there will be adverse tax consequences to them.

Code S 125(d) requires that a cafeteria plan be in writing and must state specific operating rules and regulations such as the description of available benefits, participation rules, election procedures and the plan year.

Since ERISA does not apply directly to cafeteria plans, it does not impose disclosure requirements for such plans. However, such requirements will apply to a cafeteria plan’s component benefit plans. Because of these SPD and SMM requirements, the cafeteria plan rules on any of these benefit plans must be disclosed in the SPD. Examples of cafeteria plan topics that are included in an SPD include participation rules, enrollment procedures and irrevocability of elections, and the circumstances under which a midyear election change is allowed.

The cafeteria plan itself does not require an ERISA Form 5500 filing. However, your component benefit plans under this cafeteria plan may require a Form 5500 filing if there are 100 or more participants on the first day of the plan year. This includes the health care flexible spending account, as well as benefits such as medical, dental, vision or life insurance.


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