8899 / What nondiscrimination requirements apply to cafeteria plans that provide benefits to highly compensated or key employees?
“Highly compensated” individuals are officers, shareholders owning more than five percent of the voting power or value of all classes of stock, those who are “highly compensated,” and any of their spouses or dependents. For this purpose, “highly compensated” means (1) any individual or participant who, for the preceding plan year (or the current plan year in the case of the first year of employment), had compensation from the employer in excess of the compensation amount specified in IRC Section 414(q)(1)(B) ($155,000 in 2024 and $160,000 in 2025 projected), and, (2) if elected by the employer, also was in the top-paid group of employees (determined by reference to Section 414(q)(3)) for such preceding plan year (or for the current plan year in the case of the first year of employment).2
Participation will be nondiscriminatory if the following requirements are satisfied:
(1) The plan benefits a classification of employees found by the Secretary of Treasury not to discriminate in favor of employees who are officers, shareholders, or highly compensated.(2) No more than three years of employment are required for participation and the employment requirement for each employee is the same.
(3) Eligible employees begin participation by the first day of the first plan year after the employment requirement is satisfied.3
Under the proposed regulations, a cafeteria plan does not discriminate in favor of highly compensated individuals if the plan benefits a group of employees who qualify under a reasonable classification established by the employer and the group of employees included in the classification satisfies the safe harbor percentage test or the unsafe harbor percentage test.4