What is a key requirement for contributions and benefits in a Cafe Plan under nondiscrimination testing?

In a Cafeteria Plan, a critical requirement for contributions and benefits is that they must be made available on a non-discriminatory basis. This means that the plan must provide equal access to the benefits for all employees, ensuring that no particular group, such as highly compensated employees, is favored over others. The purpose of this requirement is to comply with Internal Revenue Service (IRS) regulations and to promote fairness in employee benefits.

The essence of a Cafeteria Plan is to allow employees the flexibility to choose from a variety of benefits that best meet their individual needs. However, if the plan disproportionately benefits highly compensated employees or limits access based on issues like tenure or specific employee classes, it could violate nondiscrimination rules. This would risk the tax-advantaged status of the benefits provided through the Cafeteria Plan, impacting both the employer’s and employees’ tax obligations.