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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.

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