IRS Expands Allowable Cafeteria Plan Mid-Year Changes to Include Enrollment in Exchange or Reduction in Hours

On September 19, 2014, the IRS issued Notice 2014-55, Additional Permitted Election Changes for Health Coverage under § 125 Cafeteria Plan. Generally, participants in a cafeteria plan must elect prior to the beginning of the plan year what benefits they want under the plan and can only make mid-year changes in their elections on account of and consistent with specified “change in status” events or “special enrollment” events, as defined in the regulations. Notice 2014-55 adds two additional circumstances under which a plan may allow participants to prospectively (and mid-year) revoke their elections of coverage under a group health plan that is not a health FSA and that provides minimum essential coverage:

• Employee’s expected hours of service change from at least 30/week to less than 30/week, even if the change does not result in the employee ceasing to be eligible under the group health plan;
• Employee is eligible for and intends to enroll in a Qualified Health Plan through a Marketplace/Exchange, either in a Special Enrollment Period or in the regular Open Enrollment Period in the Marketplace.

Notice 2014-55 Addresses  Interaction of ACA and Existing Cafeteria Plan Rules

Under existing cafeteria plan rules, eligible employees can only make mid-year election changes if they have an allowable mid-year change and the change results in a loss of coverage under the particular employer plan, and the election change is on account of and consistent with the change event. Because of several new Affordable Care Act (ACA) provisions, an employee might have a mid-year event for which the employee would want to drop coverage under the employer group health plan, but the event would not fit into the existing categories of allowable change events and would not meet the requirements noted above (e.g., would not result in loss of coverage). Specifically, the two ACA changes addressed by this notice are:

• If an employer uses the Look-Back Measurement Method to determine an employee’s full-time status (for purposes of new IRC section 4980H), an employee who was full-time during the Measurement Period will be eligible for coverage during the associated Stability Period even if the employee’s hours are reduced and the employee is no longer full-time. Thus, an employee in this position who was enrolled in the employer’s medical plan would not be able to drop it and enroll instead in Exchange coverage (where the employee might qualify for a subsidy for coverage for the employee and family).
• An employee who becomes eligible to enroll in a QHP in the new Marketplaces—either for a Special Enrollment Period or during the regular Open Enrollment Period—would not be able under existing cafeteria plan rules to drop coverage under the employer’s medical plan, because becoming eligible for (or enrolling in) another group health plan does not cause the employee to lose coverage under the employer’s group health plan.

Conditions for Revocation due to Reduction in Hours of Service

An employer can amend its cafeteria plan to allow an employee to make a prospective mid-year revocation of his or her prior election for group medical coverage if:

• The employee’s expected hours of service change from at least 30/week to less than 30/week, even if the change does not result in the employee ceasing to be eligible under the group health plan (e.g., because the employee is in a “stability Period); and
• The employee’s revocation of coverage under the group medical plan corresponds to the intended enrollment of the employee (and spouse and dependents, if applicable) in another plan that provides minimum essential coverage and that will be effective no later than the first day of the second month following the month in which the employer group coverage is revoked.

Conditions for Revocation due to Enrollment in a Qualified Health Plan

An employer can amend its cafeteria plan to allow an employee to make a prospective mid-year revocation of his or her prior election for group medical coverage if:

• The employee is eligible for a Special Enrollment Period to enroll in a Qualified Health Plan (QHP) through a Marketplace, or the employee seeks to enroll in a QHP during the Marketplace’s annual Open Enrollment Period; and
• The employee’s revocation of coverage under the group medical plan corresponds to the intended enrollment of the employee (and spouse and dependents, if applicable) in a QHP through a Marketplace for new coverage that will be effective no later than the day immediately following the last day that the employer group medical plan is effective.

Examples of why this might occur: An employee in a non-calendar year cafeteria plan might want to switch to a QHP through the Marketplace but not have a transition period of double coverage or no coverage. Or an employee who gets married or has a new dependent might find it more advantageous to enroll the new members (and the employee) under a QHP in the Marketplace, rather than enroll them in the employer’s group medical plan.

Three Important Items to Note

• An employer who allows participants to make mid-year changes based on Notice 2014-55 may rely on the reasonable representation of an employee (and spouse and dependents, if applicable) that they have enrolled or intend to enroll in another plan that meets the above requirements.
• Notice 2014-55 does not allow participants to change their Health FSA elections mid-year even if they have a reduction in hours or they enroll in a QHP through the Marketplace.  It only allows a mid-year change in the election for coverage under the employer’s group medical plan.
• Notice 2014-55 does not require cafeteria plan sponsors to amend their plans to allow the two new mid-year changes, but it does allow them to do so. Most plan sponsors will want to make these amendments, but possible drawbacks are the cost (if any) for the Amendment and the fact that if an employer has a large percentage of employees who want to drop employer coverage, the carrier could increase rates for the remaining participants.

Effective Date and Plan Amendments

The guidance is effective September 18, 2014. Employers who want to permit the new mid-year changes must amend their cafeteria plans to provide for such election changes. 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 employer notifies participants of the amendment and operates the plan in accordance with this notice. Additionally, the notice provides that an employer may amend its 125 plan on or before the last day of the 2015 plan year to implement these new changes for the prior plan year that begins in 2014. However, an election to revoke coverage cannot be made retroactively.

Employers may rely on this notice pending further guidance.  IRS intends to amend Regs. 1.125-4 to include the guidance in this notice.

Next Steps for Employers

Employers who want to amend their cafeteria plans to implement the guidance in Notice 2014-55 should contact their Cafeteria Plan administrators.  Many TPAs are preparing Plan Amendments and have notified plan sponsors that these Amendments will be available.

Employers also must notify plan participants of the changes and the effective date.  TPAs probably also are preparing communications materials that plan sponsors can send to cafeteria plan participants.