Offer a Cafeteria Plan? New Election Changes Now Allowed
If your organization offers a cafeteria plan, take note: The IRS has expanded the permitted election change rules. Now allowed are midyear election changes for two additional situations in which employees may want to drop their employer-sponsored health care coverage.
Beginning Sept. 18, 2014, cafeteria plans may allow employees in these two situations to prospectively revoke an election for coverage under a group health plan that:
- Isn’t a health care Flexible Spending Account, and
- Provides minimum essential coverage when specific conditions are met.
These changes were announced in IRS Notice 2014-55.
Reduction of hours
The first situation involves an employee whose hours of service have been reduced to less than 30 hours per week without a corresponding loss of eligibility for the employer’s group health plan — for example, because the plan’s eligibility provisions have been drafted to avoid penalties under the Affordable Care Act’s “play or pay” provisions.
Such an employee may drop group health plan coverage midyear, but the change must correspond to the employee’s intended enrollment (and the intended enrollment of any related individuals whose coverage is being dropped) in other minimum essential coverage.
The new coverage must be effective no later than the first day of the second month following the month in which the original coverage is dropped. Cafeteria plans may rely on an employee’s reasonable representation about the intended enrollment.
This particular election change would accommodate an employee who wishes, for example, to enroll in the plan of a spouse’s employer after the reduction of hours. Note also that election changes under this provision aren’t limited to situations involving the play-or-pay rules.
The second situation involves an employee who’d like to change from the employer’s group health plan to Health Insurance Marketplace coverage without a period of duplicate coverage or no coverage. Such an employee may drop group health plan coverage midyear — but only if the change corresponds to the employee’s intended enrollment (and the intended enrollment of any related individuals whose coverage is being dropped) in the Health Insurance Marketplace coverage that’s effective no later than the day after the last day of the original coverage. Cafeteria plans may rely on an employee’s reasonable representation about the intended enrollment.
This additional election was intended, at least in part, to allow employees participating in non-calendar-year plans to elect Health Insurance Marketplace coverage during a Marketplace’s open enrollment period and drop their employer-provided coverage when the Marketplace’s coverage takes effect.
The IRS intends to amend the permitted election change regulations under Internal Revenue Code Section 125 to reflect the new guidance. But taxpayers can rely on the guidance immediately.
Also, allowing the additional election changes is optional and will require a plan amendment. The amendment generally must be adopted on or before the last day of the plan year in which the additional changes are allowed. The changes can be effective retroactively to the first day of that plan year, provided that the plan operates in accordance with the guidance and that participants are informed of the amendment.
Under a special rule, employers that begin allowing the changes during the 2014 plan year have until the last day of the 2015 plan year to adopt an amendment. Although plan amendments may be adopted retroactively, election changes to revoke coverage retroactively aren’t permitted.
The additional permitted election changes provide increased flexibility and resolve questions about the interaction between the Affordable Care Act and the permitted election change rules, which were drafted long before the act was signed into law.
If your organization intends to allow the additional changes, you’ll likely appreciate having some extra time to amend your plan. Should you need time to think about it, however, remember to keep the deadline in mind. Also don’t forget that, if you’ll be allowing the additional changes, you must communicate such plan revisions to employees while properly coordinating them with third-party administrators or other service providers.