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The IRS requires these changes to be incorporated into the written cafeteria plan
Many employers permit employees to pay for employer-sponsored health coverage, on a pre-tax basis, under Internal Revenue Code section 125 (cafeteria) plans. These plans generally require employees to make an irrevocable election to participate before the beginning of the health coverage period.
Internal Revenue Service rules typically do not allow midyear changes to cafeteria plan elections unless the employer adopts special change in status rules and incorporates those rules in a written cafeteria plan document. Change in status rules apply in fairly limited circumstances and generally permit prospective midyear election changes only when an employee experiences certain personal status changes (e.g., family, residence, employment) or when there are significant cost or coverage changes under the employer’s health plan.
Moreover, the cafeteria plan consistency rule requires any proposed election change to be consistent with the employee’s status change.
However, to coordinate the change in status rules with other Affordable Care Act guidance, the IRS released Notice 2014-55, which took effect Sept. 18, 2014, and expressly permits cafeteria plans to allow election changes midyear when two additional circumstances arise. The guidance:
• Permits a prospective election change if an employee’s hours drop below 30 hours per week (even if there is no adverse effect on eligibility for employer-sponsored coverage).
• Permits an employee to revoke a prior election to select coverage under one of the health insurance exchanges created by the Affordable Care Act.
As with the existing cafeteria plan midyear election change rules, these new rules are optional. Employers are not required to adopt these midyear changes in their cafeteria plans. If employers allow the midyear changes, Notice 2014-55 permits employers to rely on reasonable representations of employees regarding weekly hours for future periods and enrollment (or intended enrollment) in other health plans.
When an employee’s hours drop below 30 hours each week, the new rules permit a cafeteria plan to allow the employee to cancel a prior group health plan coverage election if that coverage is (1) minimum essential coverage (MEC) and (2) not coverage under a health care flexible spending account (FSA). There are two conditions on this type of election change:
• There was a reasonable expectation for the employee to work an average of at least 30 hours each week, but a change in employment status reduced that average hours expectation to less than 30 hours, even though the reduction did not trigger ineligibility under the employer-sponsored group health plan.
• The election revocation corresponds with the employee’s intention to enroll in another plan that provides MEC, with coverage effective no later than the first day of the second month after the month that includes the date the employee revoked the original coverage.
The second condition applies to all family members enrolled in employer-sponsored coverage due to the employee’s election. In other words, because of the cafeteria plan consistency rule, the employee may not drop coverage altogether. The employee must obtain coverage (under an exchange, spouse’s plan or another MEC plan) for the employee plus any other person enrolled in the employer’s group health plan due to the employee’s prior coverage election.
The general rule is that employees cannot drop employer-sponsored coverage during the coverage period when they become eligible to enroll in exchange coverage. This is significant particularly for employees with group health plan coverage under noncalendar-year plans, because an employee’s transition to exchange-based coverage could entail choosing between temporarily losing coverage altogether or temporarily paying for duplicative coverage (i.e., both employer-sponsored coverage and exchange-based coverage). The new rules, however, help avoid this by permitting a cafeteria plan to allow a midyear election change if:
• The employee is eligible to enroll in a qualified health plan offered through an exchange due to a special enrollment period or the employee seeks to enroll in a qualified health plan during the exchange’s annual open enrollment period.
• The election revocation corresponds with the employee’s intention to enroll in a qualified health plan through an exchange, with coverage effective no later than the day immediately after the last day of the original coverage that the employee revoked.
Like the prior rule addressing changes due to weekly hour reductions, this rule requires the employee to obtain coverage for related individuals who lose coverage due to the employee’s election revocation.
As with any plan design change, the IRS requires these rules to be incorporated into the written cafeteria plan document (if the employer is inclined to adopt them). Although Notice 2014-55 provides a Dec. 31, 2015 amendment deadline for these rules, it may be more efficient to add them to the plan in 2014 along with the following required and optional plan changes:
• Required change: Maximum contribution to health FSA. An amendment reflecting the $2,500 (or lower) maximum contribution limit for health care flexible spending accounts that took effect on Jan. 1, 2013, must be adopted retroactively by Dec. 31, 2014. (The maximum contribution limit increases to $2,550 for 2015.)
• Optional change: Health FSA $500 rollover balance. To allow employees to roll over (into 2015) $500 of unused health care FSA funds, an amendment reflecting the rollover feature (and removing any 2-1/2 month grace period applicable to 2014 amounts) must be adopted by Dec. 31, 2014.
Christina M. Crockett is an associate in the Washington D.C. office of Ogletree Deakins. © 2014 Ogletree Deakins. All rights reserved. Reposted with permission.
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