New Mid-Year Election Changes Permitted in Section 125 Cafeteria Plans (Benefit Minute)
The Internal Revenue Service has issued IRS Notice 2014-55, which permits two new types of mid-year election changes under a section 125 cafeteria plan. The primary purpose of these additional election change opportunities is to facilitate enrollment in the Health Insurance Marketplace. Section 125 regulations will be modified consistent with the guidance in the Notice, but employers may rely on it immediately. These new election change rules do not apply to health care flexible spending accounts.
As with other cafeteria plan election change provisions, these new mid-year election change opportunities are permissive but not required. A plan sponsor can determine whether or not to allow prospective election changes under the circumstances described below. Employers who wish to allow one or both of these cafeteria plan election changes should consider the impact on their employer shared responsibility requirements and exposure to penalty.
Marketplace Special Enrollment and Open Enrollment
An employee who intends to enroll in a Qualified Health Plan due to Marketplace Open Enrollment (annually) or Special Enrollment may be permitted to drop group health plan coverage in the middle of the cafeteria plan year. Marketplace Open Enrollment for 2015 begins on November 15, 2014 and allows individuals to enroll in a Marketplace plan effective January 1, 2015.
Events that trigger Marketplace Special Enrollment include (but are not limited to) a change in household size due to marriage, birth, adoption, divorce or death; or a change in circumstances, including change in income. The change must have occurred within the prior 60 days.
An employer may rely on the reasonable representation of an employee that the employee has enrolled or intends to enroll in a Qualified Health Plan that is effective beginning no later than the day immediately following the date the group health plan coverage is terminated. This new election change opportunity may be particularly useful to employers with non-calendar year cafeteria plans who have employees who want to purchase a Qualified Health Plan during the Marketplace Open Enrollment. Prior to the new guidance, this would not have been permitted under section 125 rules. The employee would have been unable to coordinate enrollment in a Qualified Health Plan with open enrollment for the employer-sponsored plan, resulting in a period of either duplicate coverage or no coverage.
Reduction of Hours
An employer that provides coverage to employees working less than 30 hours per week may permit an employee to terminate coverage in the middle of the cafeteria plan year if the employee’s hours are reduced below 30 (even if the employee is still eligible for coverage) to correspond with the employee’s intended enrollment in another plan that provides minimum essential coverage, including a Qualified Health Plan through the Marketplace. The new coverage must be effective no later than the first day of the second month following the date the coverage is terminated. The employer may rely on the reasonable representation of an employee that the employee has enrolled or intends to enroll in another plan.
This new election change opportunity may be useful to employers who use a look-back period to identify full-time employees. Prior to this guidance, neither the employee nor the employer could have terminated coverage during the entire stability period. With this new guidance, an employee may elect to terminate coverage if the employee is now reasonably expected to average less than 30 hours per week, as long as the employee enrolls in other minimum essential coverage within two months (this termination of coverage is at the election of the employee, not the employer).
Required Plan Amendments
An employer that wishes to adopt one or both of these additional section 125 election change opportunities must amend the section 125 cafeteria plan accordingly. In general, the amendment must be adopted on or before the last day of the plan year in which the new election changes are allowed and may be retroactive to the first day of the plan year, as long as the cafeteria plan operates in accordance with the guidance in the Notice. However, for a section 125 cafeteria plan beginning in 2014, the amendment must be adopted on or before the last day of the plan year that begins in 2015. An employer that intends to amend the cafeteria plan in accordance with this Notice must inform participants of the new election change opportunities.
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