Cafeteria plans, which include benefits like medical FSAs, DCAPs, and other flexible spending accounts, enjoy favorable tax treatment. However, to maintain these tax advantages, these plans must comply with strict nondiscrimination rules.

These rules are designed to ensure that benefits are fairly distributed among all employees and that highly compensated employees (HCEs) do not receive disproportionate benefits.

Key Nondiscrimination Tests:

To ensure compliance, cafeteria plans must pass three main nondiscrimination tests:

• Eligibility Test: This test ensures that a sufficient number of non-HCEs are eligible to participate in the plan.

• Benefits Test: This test examines whether HCEs receive significantly greater benefits compared to non-HCEs.

• Utilization Test: This test evaluates whether HCEs actually utilize a greater portion of the plan benefits compared to non-HCEs.

Consequences of Non-Compliance:

If a plan fails the nondiscrimination tests, contributions made by HCEs may become taxable, potentially resulting in significant financial consequences for the company and its employees.

Proactive Measures:

To minimize the risk of non-compliance, we recommend conducting mid-year tests to proactively identify and address any potential issues. Contact your APA Benefits account manager to schedule a mid-year test.

2. Cafeteria Plan 5500 Filing Requirements

Certain cafeteria plans are required to file Form 5500 with the Department of Labor.

Filing Requirements:

• Plan Size: Plans with 100 or more participants on the first day of the plan year are generally required to file Form 5500.

• Plan Funding: Self-funded plans (where the employer directly assumes the financial risk for employee healthcare costs) are also typically required to file.

Filing Deadline:

Form 5500 must be filed within seven months after the end of the plan year. Contact your APA Benefits account manager today to learn more about our cafeteria plan administration services and ensure your plan remains compliant with all applicable regulations.