Compliance Essentials: Plan Documents and SPDs, Nondiscrimination Testing, and Cafeteria Plans Explained

5/5/25

For employers and brokers, ensuring compliance with health and welfare benefits regulations is a critical aspect of offering competitive and legally sound benefits packages. Employers must navigate complex requirements, including plan documents and Summary Plan Descriptions (SPDs), nondiscrimination testing, and Cafeteria Plans. Understanding these compliance essentials can help avoid costly penalties and maintain a smooth benefits administration process.

Summary Plan Descriptions (SPDs)

SPDs are a fundamental compliance requirement under the Employee Retirement Income Security Act (ERISA). These documents serve as the primary way to communicate plan rights, obligations, and benefits to employees. SPDs must be provided to participants in employer-sponsored health and welfare plans and should include:

A clear summary of plan benefits
Eligibility requirements
Claims and appeals processes
Plan sponsor and administrator details
ERISA rights and protections

Failure to provide accurate and timely SPDs can result in penalties for employers. Regular updates, such as Summaries of Material Modifications (SMMs) and plan amendments, are also necessary when plan details change.

Nondiscrimination Testing

To ensure that benefits are not disproportionately favoring highly compensated employees (HCEs) or key employees, the IRS requires employers to conduct nondiscrimination testing. These tests assess whether self-funded plans (including Health Reimbursement Accounts (HRAs) or pre-tax benefit plans comply with fairness standards set by the IRS.

What Is a Cafeteria Plan?

A cafeteria plan, governed by IRS, allows employees to choose from a variety of pre-tax benefit options, such as health insurance premiums, Health FSAs, and Dependent Care FSAs. These plans provide tax savings for both employers and employees but must meet nondiscrimination requirements to maintain their tax-advantaged status. They also must be in writing to maintain compliance and require regular updates to align with regulatory changes.

Key nondiscrimination tests include:

Cafeteria Plans:

Eligibility Test
Key Employee Concentration Test
Contributions and Benefits Test

Health FSA:

Eligibility Test
Benefits Test

Note: In addition to the requirements under the IRS, a Health FSA must also meet the requirements under ERISA, if ERISA is applicable to the employer.

Dependent Care FSA:

Eligibility Test
More Than 5% Owners Concentration Test
55% Average Benefits Test
Contributions and Benefits Test

Self-funded Plans (including HRAs):

Eligibility Test
Benefits Test

Failing nondiscrimination testing can result in the loss of tax advantages, requiring HCEs to report additional taxable income. Regular testing helps employers stay compliant while maintaining tax-advantaged status for these benefits.

Premium Only Plans (POPs)

A POP is a type of cafeteria plan and is a simple way for employees to pay for their health insurance premiums on a pre-tax basis, reducing taxable income for both employees and employers. These plans must also be in writing to maintain compliance and require regular updates to align with regulatory changes. Key benefits include:

Tax savingsfor both employees and employers
Simplified administrationcompared to full cafeteria plans
Increased take-home payfor employees by lowering taxable income

How Lifetime Benefit Solutions Supports Compliance

Navigating the complexities of plan documents and SPDs, nondiscrimination testing, and POPs can be overwhelming, but Lifetime Benefit Solutions (LBS) provides comprehensive compliance services to simplify the process. Our solutions include:

Plan Documentation Services: We offer, plan documents and SPDs, SMMs, and amendments tailored to your specific needs.
Nondiscrimination Testing: Our online platform provides instant testing results and printable compliance reports.
Form 5500 Preparation: We assist with electronic filing for eligible plans, ensuring compliance with ERISA requirements.

With LBS, brokers and employers can streamline their compliance processes while focusing on providing valuable benefits to employees. Contact us today to learn how we can support your compliance needs.