IRS Expands Midyear Election Change Rules for Section 125 Plans

Originally posted October 1, 2014 on http://blog.thinkhr.com.

On September 18, 2014, the Internal Revenue Service (IRS) issued Notice 2014-55, Additional Permitted Election Changes for Health Coverage under § 125 Cafeteria Plan, which allows employers to make specific changes to their plans. These changes will make it easier for employees to change their group plan elections and take advantage of individual health plans available to them through the Marketplace exchanges created by the Affordable Care Act (ACA).

Section 125 cafeteria plans generally require participants to make binding elections for an entire plan year, with employers being able to allow employees to make changes only in limited cases (e.g., marriage, birth, or adoption of child). With the issuance of Notice 2014-55, the list of possible exceptions expands somewhat, making it possible for the employer to amend its plan design to allow an employee to drop employer-sponsored group coverage in order to enroll in a state or federally-facilitated Health Insurance Marketplace.

This guidance applies only to health coverage offered through a cafeteria plan that is minimum essential coverage. Thus, it does not apply to stand-alone dental and/or vision coverage or to health flexible spending accounts (FSAs). Further, an employer’s choice to amend its plan to adopt any of these exceptions is voluntary.

Reduction in Hours

Under the new exceptions, if an employee experiences a reduction in work hours to less than 30 hours per week, the employee may revoke coverage in the cafeteria plan if he or she plans to enroll in coverage through the Marketplace or another health plan.

This new opportunity for exemption could allow an employee who is changing to part-time status to benefit from subsidies available through the Marketplace. This is likely to be the case if an employee expects to experience lower household income after a change in status.

Previously, participant elections were irrevocable during the plan year unless the employee experienced certain family status changes, or unless the plan sponsor made significant changes to coverage or cost. For instance, under the ACA’s employer shared responsibility (play or pay) rules, a variable-hours employee may be covered for an entire “stability period” although the employee’s work schedule and earnings may change dramatically. The existing cafeteria plan rules would not allow the employee to revoke coverage in that case. The new exceptions, however, permit the employer to amend the cafeteria plan so an employee in that circumstance would be able to drop the coverage before the end of the stability period.

If a plan intends to adopt this exception, the following requirements must be met:

An employee must have been expected to average at least 30 hours per week prior to an actual change in the employee’s status that results in the expectation that the employee will average less than 30 hours per week. It does not matter if the employee will actually lose health plan eligibility due to hours — the expectation of averaging 30 hours per week is the test.
The change must correspond to the employee — including dependents experiencing a resulting change in coverage — intending to enroll in another plan providing minimum essential coverage.
The new coverage must be effective by the first day of the second month following the month in which the original coverage is revoked.

“Intending to enroll” in other coverage is determined by the statement of the employee experiencing a change in status. The employer may rely on such an employee’s reasonable representation of intentions. This reasonable representation applies to the employee and any related individuals impacted by the change.

Changes in Connection with Marketplace Enrollment

The IRS Notice also provides for another exception so employees can make midyear election changes. This new exception may be beneficial to employees who are covered by non-calendar year cafeteria plans, or who are finding Marketplace plans more attractive after a change in family status, to resolve the gap between an employer’s cafeteria plan year and the Marketplace open enrollment January 1st effective date. The current cafeteria plan rules do not allow employees to drop coverage at work midyear in order to enroll in a Marketplace plan. The Marketplace offers open enrollment for new policies starting January 1; however, many employer plans do not operate on a calendar-year basis.

Employers are now able to adopt provisions allowing an employee to revoke an enrollment election in order to obtain coverage through the Marketplace. The following conditions must be met for this exception to be allowed:

The employee must be seeking to enroll in the Marketplace during annual open enrollment or during a special enrollment period.
Enrollment in the Marketplace plan must be effective immediately following loss of coverage from the employer-sponsored plan.
Any related individuals who were dependent on the employee’s previous enrollment must also be enrolled in the new plan.

In this case, the employer is not required to prove that other coverage is actually elected. Rather, the employer is allowed to rely on the reasonable representation of an employee that he or she is intending to enroll in Marketplace coverage immediately after the change to enrollment in the employer’s plan is effective. Thus, there should be no gap in coverage if an employee is allowed to exercise this option.

Adopting the New Optional Provisions

Employers may adopt one or both of the new exceptions for midyear election changes by amending the cafeteria plan. For convenience, the IRS is allowing employers to amend their plans for the 2014 plan year by adopting the amendment at any time on or before the last day of the plan year that begins in 2015. Although the employer has extra time to adopt the formal amendment, the employer must take the following steps before allowing the exceptions:

Operate the cafeteria plan in accordance with the guidance outlined in IRS Notice 20144-55; and Notify all plan participants of the changes.

For complete details, read IRS Notice 2014-55.

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