As part of the Patient Protection and Affordable Care Act of 2010 (PPACA), better known as health care reform, a new form of qualified cafeteria plan was created for small employers (defined as having 100 or fewer employees) beginning in 2011.  The Simple cafeteria plan enables the employer to automatically pass the otherwise-required nondiscrimination rules by following a few benefit eligibility and contribution provisions.

More on the new Simple cafeteria plans can be found here.

Jon Gabel, a senior fellow at the National Opinion Research Center of the University of Chicago, analyzed the nonpartisan Congressional Budget Office’s (CBO) forecasts of three major changes in the Medicare program relative to their ultimate outcomes.  In all three cases, the CBO significantly underestimated savings and overestimated the costs.

In today’s health care reform debate, these estimates are critical for the Administration and Congress to choose a path appropriate for our nation’s needs.

You can read Gabel’s New York Times Op-Ed piece here.

Senator Olympia Snowe (R-ME), along with Senators Jeff Bingaman (D-NM) and Kit Bond (R-MO) introduced S. 988, the SIMPLE Cafeteria Bill.  This is an excellent piece of legislation that enables needed changes to Section 125 cafeteria plans for employers in all sectors, as well as creating parity in this area for small employers.

First, a limited health care FSA carryover provision is in the bill to enable a design alternative to the IRS-created “use it or lose it” rule.

Second, dependent care FSA limits are raised for the first time since 1986 from the current $5,000 cap to $7,500 for one dependent and $10,000 for two or more dependents.

Third, small employers that are sole proprietors, sub-Chapter S corporations, partnerships, LLCs, and others would be allowed to participate in their own cafeteria plans.

Fourth, and perhaps most importantly for small employers, if the employer were willing to make a contribution to the cafeteria plan (such as an employer contribution towards health insurance), the small employer unfriendly nondiscrimination tests would be considered automatically satisfied.  To illustrate this last issue, consider the following case.  A three person firm has a Section 125 plan solely to allow for premium conversion of employee contributions to a health plan.  All three employees, including the owner, have family health coverage, and all three employees must contribute 10 percent of the health care cost.  Even though this appears to be totally nondiscriminatory since the same coverage is available to all three people, all elect the same coverage, and all pay the same cost-share, under current rules the plan fails the 25% nondiscrimination test since the owner’s premium co-share represents 33-1/3% of the plan’s contributions.  Ridiculous.

This is a well thought-out bill, and deserves support from all sectors.