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Simple cafeteria plans for small businesses

by Tony Novak, CPA, MBA, MT
,published 4/7/2005, last updated on 12/1/2011

Three U.S. Senators co-sponsored a bill this week that would amend the tax code so that more small business employees would be able to purchase employer-provided health insurance with tax-free dollars.  This legislation called the “SIMPLE Cafeteria Plan Act of 2005” would create a Simple Cafeteria Plan for small businesses that would be modeled after the Savings Incentive Match Plan for Employees (SIMPLE) pension plan enacted in 1996. This legislation would loosen the rules that allow employers to deduct health insurance expenses provided to employees though a cafeteria plan. While simple and inexpensive cafeteria benefit plans are already available to small businesses through services like Freedom Benefits Association (www.FreedomBenefits.org), current cafeteria laws must follow non-discrimination rules. The proposed law would eliminate the current non-discrimination requirements of cafeteria benefit plans in order to make it easier for employers to include themselves in the benefit plans without providing the same level of benefits to the majority of other employees.

Although the intent of making health insurance easier for small businesses is admirable, this proposal is unlikely to be passed because it opposes fundamental tax and accounting policies designed to protect employees. The proposed bill would raise the risk that health plans would favor owners and key employees without having any net effect on the taxation of health insurance for small businesses. Health insurance for employees is already a fully deductible expense for all businesses under current law, regardless of whether provided through a formal benefit plan or just on an informal selective basis. Small business owners, self-employed individuals, partners and owners of s-corporations now deduct the full cost of health insurance on their individual tax returns. There is no need to further amend tax laws for health insurance since health insurance is always fully tax-deductible to either the business or the individual without any need for a cafeteria plan. The proposal is unlikely to gain majority support with either the Democrat or Republican lawmakers.

Recent improvements in consumer drive health plans for small businesses called Health Reimbursement Arrangements allow employers to provide flexible health benefits with more flexibility and at a lower cost than a cafeteria benefit plan. Health Reimbursement Arrangements are favored by the IRS and provide attractive options to the employer and the individual employees.

Freedom Benefits Association reports that the average cost of providing health benefits through an HRA plan is lower than through a regular health insurance plan, although specific cost data is unavailable. The majority of small business HRA plans are less than two years old so data on net cost and savings is still being collected. The average administrative cost for running an HRA plan at Freedom Benefits is $150 per year vs. about $450 for a simple cafeteria benefit plan. Freedom Benefits provides small businesses with professional support for low cost employee benefit plans on an hourly basis. The time required by an administer to run a cafeteria benefit plan is about four hours per year, whereas the time required to run the same benefits through an HRA can be as little as one hour per year.

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