Judy Kamens Compliance Specialist View Bio

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Cafeteria Plan Mid-Year Election Changes       

September 29, 2014
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On Sept. 18, 2014, the Internal Revenue Service (IRS) issued Notice 2014-55, which expands the situations in which individuals can change their health coverage elections under an Internal Revenue Code (Code) Section 125 cafeteria plan.

This guidance will be welcomed by individuals whose ability to enroll in coverage under a Health Insurance Exchange would have been limited by current IRS regulations.

The IRS intends to modify the regulations under Code Section 125 to be consistent with this notice, but taxpayers may rely on this guidance immediately.

CAFETERIA PLAN ELECTIONS

In most cases, a participant may not change his or her elections under a cafeteria plan during the period of coverage (usually the plan year). However, there are limited exceptions for certain changes in status, if permitted by the plan and if the election change is consistent with the change in status.

Notice 2014-55 addresses cafeteria plan elections in two specific situations related to the availability of coverage through a Health Insurance Exchange (or Marketplace). An employee may want to revoke an election under his or her employer’s plan in order to purchase coverage through an Exchange if:

1)    The employee’s hours of service are reduced so that the employee is expected to average less than 30 hours of service per week, but the reduction does not affect eligibility for coverage under the employer’s group health plan; or

2)    The employee would like to cease coverage under the employer’s group health plan and purchase coverage through an Exchange, without having a period of either duplicate coverage or no coverage.

In each of these situations, Notice 2014-55 permits a cafeteria plan to allow an employee to prospectively revoke his or her election for coverage under the employer’s group health plan during a period of coverage, as long as the plan:

  • Is not a health FSA; and
  • Provides minimum essential coverage (MEC).

Certain conditions must be met for the change to be permitted.  Also, an election to revoke coverage on a retroactive basis is not allowed.

1)   Conditions for Election Changes Due to Reduction in Hours of Service

A cafeteria plan may allow an employee to prospectively revoke an election of coverage under a group health plan if both of the following conditions are met:

  • An employee who was reasonably expected to average at least 30 hours of service per week has a change in employment status so that the employee will reasonably be expected to average less than 30 hours of service per week after the change (even if that reduction does not result in the employee ceasing to be eligible under the group health plan); and
  • The revocation of the election of coverage under the group health plan corresponds to the intended enrollment of the employee (and any related individuals who cease coverage due to the revocation) in another plan that provides MEC. The new coverage must be effective no later than the first day of the second month after the month in which the original coverage is revoked.

A cafeteria plan may rely on an employee’s reasonable representation that he or she and related individuals have enrolled (or intend to enroll) in another plan that provides MEC within the required timeframe.

2)   Conditions for Election Changes Due to Exchange Enrollment

A cafeteria plan may allow an employee to prospectively revoke an election of coverage under a group health plan if both of the following conditions are met:

  • The employee is eligible for special enrollment in an Exchange plan OR the employee wants to enroll in an Exchange plan during the Exchange’s annual open enrollment period; and
  • The revocation of the election of coverage under the group health plan corresponds to the intended enrollment of the employee (and any related individuals who cease coverage due to the revocation) in an Exchange plan. The Exchange coverage must be effective beginning no later than the day immediately following the last day of the original coverage that is revoked.

A cafeteria plan may rely on the reasonable representation of an employee who has an enrollment opportunity for an Exchange plan, that he or she and related individuals have enrolled (or intend to enroll) in an Exchange plan for new coverage that is effective within the required timeframe.

PLAN AMENDMENTS REQUIRED

To allow the new permitted election changes under Notice 2014-55, a cafeteria plan must be amended to provide for the election changes.

In general, the amendment must be adopted on or before the last day of the plan year in which the elections are allowed. It may be effective retroactively to the first day of that plan year, if:

  • The cafeteria plan operates in accordance with guidance under Notice 2014-55; and
  • The employer informs participants of the amendment.

However, a cafeteria plan may be amended to adopt the new permitted election changes for a plan year that begins in 2014 at any time on or before the last day of the plan year that begins in 2015.

EFFECTIVE DATE

The guidance contained in Notice 2014-55 is effective on Sept. 18, 2014. The IRS intends to amend the current cafeteria plan regulations to reflect the guidance in this notice. However, taxpayers may rely on the guidance in Notice 2014-55 until further guidance is issued.

DOWNLOAD THE PDF:

Cafeteria Plan Mid-Year Election Changes

This Legislative Brief is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.