The IRS allows employees to pay for certain benefits with pre-tax dollars through an employer-sponsored Code section 125 (cafeteria) plan. As a condition of receiving the tax-favored benefit, the IRS requires cafeteria plans to follow certain rules. One of those rules is that a participant’s election must be set for the entire plan year and may be changed for only limited circumstances. The IRS recognizes a limited set of events for which plan sponsors may allow mid-year election changes.
All changes to benefits made as a result of a mid-year event must be consistent with the event. Employees must request the change within 30 days of the event (60 days for certain losses of coverage under government plans). Changes must be prospective, except certain HIPAA special enrollment events for which the change may be applied back to the date of the event.
Recently, the IRS expanded the permissible mid-year change events due to the COVID-19 pandemic. Through the end of 2020, a plan sponsor may (but does not have to) allow a participant to change medical plan and FSA elections for basically any reason. Absent the new 2020 COVID-19 change events, plan sponsors may allow mid-year changes for only the events listed below. Employers may wish to review the events and incorporate into their plan documents those events they will recognize as allowing a mid-year election change.
- Change in Status (Applies to Premium Payment Benefits, Health FSA Benefits, and Dependent Care FSA).
- Your legal marital status, including marriage, divorce, death of a spouse, legal separation or annulment;
- The number of your dependents, including birth, adoption, placement for adoption or death of a dependent;
- You, your spouse’s or your dependent’s employment status affecting eligibility that is a termination or commencement of employment, a strike or lockout, a commencement of or a return from an unpaid leave of absence, or a change in worksite;
- Your spouse’s or your dependent’s employment status that causes you, your spouse or your dependent to become or cease to be eligible for a benefit offered under the Plan, which may include a change between full-time and part-time employment;
- Your dependent’s eligibility for coverage under a benefit offered through the Plan because of the attainment of a particular age, a change in student status, or other similar event;
- Change in your, your spouse’s, or your dependent’s residence or worksite (primarily a factor for HMO service area); or
- HIPAA Special Enrollment Rights (Applies Only to Premium Payment Benefits for the Medical Plan). A HIPAA special enrollment right will arise in the following circumstances:
- You or your spouse or dependent declined to enroll in group health plan coverage because of having coverage, and eligibility for such coverage is subsequently lost because: (1) the coverage was provided under COBRA, and the COBRA coverage was exhausted; or (2) the coverage was non-COBRA coverage, and the coverage terminated due to loss of eligibility for coverage or the employer contributions for the coverage were terminated;
- A new dependent is acquired as a result of marriage, birth, adoption, or placement for adoption;
- Your or your dependent’s coverage under a Medicaid plan or state children's health insurance program is terminated as a result of loss of eligibility for such coverage; or
- You or your dependent becomes eligible for a state premium assistance subsidy from a Medicaid plan or through a state children's health insurance program with respect to coverage under the group health plan.
The eligibility period for special enrollment extends for 30 days from the date of the event, or 60 days from the loss of eligibility or eligibility for assistance with coverage under Medicaid or CHIP. With respect to marriage and birth, adoption or placement for adoption of a child, coverage can be retroactive to the date of the event. For other events, the enrollment is effective as of the date the enrollment request is processed and approved.
- Certain Judgments, Decrees, and Orders (Applies to Premium Payment and Health FSA Benefits, but Not to Dependent Care FSA Benefits). If a judgment, decree, or order resulting from a divorce, legal separation, annulment, or change in legal custody requires accident or health coverage for your child (including a foster child who is your dependent), then you may (1) change your election to provide coverage for the child; or (2) change your election to revoke coverage for the child if the Order requires that another individual provide coverage under that individual's plan, and such coverage is actually provided.
- Medicare and Medicaid (Applies to Premium Payment Benefits, to Health FSA Benefits as Limited Below, but Not to Dependent Care FSA Benefits). If you or your spouse or dependent who is enrolled in a health plan under the Plan becomes entitled to Medicare or Medicaid then you may prospectively reduce or cancel the health or accident coverage of the person becoming entitled to Medicare or Medicaid and/or your Health FSA coverage may be canceled. If you or your spouse or dependent who has been entitled to Medicare or Medicaid loses eligibility for such coverage, then you may prospectively elect to commence or increase the accident or health coverage of the individual who loses Medicare or Medicaid eligibility and/or your Health FSA coverage may commence or increase.
- Change in Cost (Applies to Premium Payment Benefits, to Dependent Care FSA Benefits as Limited Below, but Not to Health FSA Benefits).
- Increase or Decrease for Insignificant Cost Changes. You are required to increase your salary reduction contributions to reflect insignificant increases in the required contribution for your Benefit Package Option(s), and to decrease the elective contributions to reflect insignificant decreases in your required contribution.
- Significant Cost Increases. If the cost charged for your Benefit Package Option(s) significantly increases during a period of coverage, then you may (a) make a corresponding prospective increase in your elective salary reduction contributions; (b) revoke your election for that coverage, and in lieu thereof, receive on a prospective basis coverage under another Benefit Package Option that provides similar coverage; or (c) drop coverage prospectively if there is no other Benefit Package Option available that provides similar coverage.
- Significant Cost Decreases. If the cost of any Benefit Package Option significantly decreases during a period of coverage, then (a) if you are enrolled in that Benefit Package Option, you may make a corresponding prospective decrease in your elective salary reduction contributions; (b) if you are enrolled in another Benefit Package Option you may change your election on a prospective basis to elect the Benefit Package Option that has decreased in cost; or (c) if you are otherwise eligible, you may elect the Benefit Package Option that has decreased in cost on a prospective basis, subject to the terms and limitations of the Benefit Package Option.
- Limitation on Change in Cost Provisions for Dependent Care FSA Benefits. The “Change in Cost” provisions apply to Dependent Care FSA benefits only if the cost change is imposed by a dependent care provider who is not a “relative” of the employee.
- Change in Coverage (Applies to Premium Payment and Dependent Care FSA Benefits, but Not to Health FSA Benefits).
- Significant Curtailment. If coverage is “significantly curtailed” you may elect coverage under another Benefit Package Option that provides similar coverage. If the coverage curtailment results in a “Loss of Coverage”, then you may drop coverage if no similar coverage is offered by the employer.
- Significant Curtailment Without Loss of Coverage. If your coverage under a Benefit Package Option under the Plan (or the your spouse's or dependent's coverage under his or her employer's plan) is significantly curtailed without a Loss of Coverage during a Period of Coverage, you may revoke your election for the affected coverage, and in lieu thereof, prospectively elect coverage under another Benefit Package Option that provides similar coverage. Coverage under a plan is deemed to be “significantly curtailed” only if there is an overall reduction in coverage provided under the plan so as to constitute reduced coverage generally.
- Significant Curtailment With a Loss of Coverage. If your Benefit Package Option coverage under the Plan (or the your spouse's or dependent's coverage under his or her employer's plan) is significantly curtailed, and if such curtailment results in a Loss of Coverage during a period of coverage, then you may revoke your election for the affected coverage and may either prospectively elect coverage under another Benefit Package Option that provides similar coverage or drop coverage if no other Benefit Package Option providing similar coverage is offered.
- Definition of Loss of Coverage. A “Loss of Coverage” means a complete loss of coverage.
- Dependent Care FSA Coverage Changes. You may make a prospective election change that is on account of and corresponds with a change in the dependent care service provider. For example: (a) if you terminate one dependent care service provider and hire a new dependent care service provider, then you may change coverage to reflect the cost of the new service provider; and (b) if you terminate a dependent care service provider because a relative becomes available to take care of the child at no charge, then you may cancel coverage.