H&W: Additional Cafeteria Plan Election Changes

The IRS has expanded the list of events that will permit an employee to change his or her cafeteria plan election. See IRS Notice 2014-55

The first change involves an employee who has been considered a full-time employee for purposes of the ACA’s shared responsibility provisions (i.e., averaging at least 30 hours per week.)  The employee has elected coverage and is paying the employee’s share of the premium on a pre-tax basis through the employer’s cafeteria plan.  During the plan year, the employee experiences a reduction in hours to less than 30 hours per week.  However, the reduction in hours would not, under the terms of the plan, result in a termination of coverage.

Under existing rules, this would not permit an election change since there has been to no loss of eligibility. Under the expanded rule, the employee can revoke his or her election of coverage under the group health plan provided that the employee obtains coverage for himself or herself (and any family members whose coverage ends due to the revocation) under another plan that provides minimum essential coverage with the new coverage effective no later than the first day of the second month following the month that includes the date the original coverage is revoked.

The second change would permit employees to drop employer-sponsored coverage in order to enroll in a Qualified Health Plan through an Exchange during the Exchange’s annual open enrollment period or a Special Enrollment period.  Existing election change rules would not permit this since they only apply to enrollment in another group health plan and not individual coverage through an Exchange.  Under the expanded rules, the employee could make the election to drop employee and family coverage provided that Exchange coverage for the affected individuals begins no later than the day immediately following the last day of coverage under the employer plan.

There are some additional points worth noting:

• The employee must make a reasonable representation that the applicable other coverage has or will commence within the specified period.  While not specifically required, best practices would suggest that the representation be made in writing.  The employer should not be aware of any reason to disbelieve the employee.
• Election changes must be prospective only.
• As with status change events generally, these additional events permit but do not require the employer to allow the election change.
• If an employer does wish to permit these changes, it must amend its cafeteria plan.
  • In general, the amendment must be adopted on or before the last day of the plan year in which the elections are allowed, and may be effective retroactively to the first day of that plan year, provided that the cafeteria plan operates in accordance with the guidance under Notice 2014-55 and the employer informs participants of the amendment.
  • However, there is a special rule for the plan year that begins in 2014.   Retroactive amendment of the 2014 plan may be made at any time on or before the last day of the plan year that begins in 2015.
  • This expansion of the election change rules does not apply to health FSAs.