Mid-Year Cafeteria Plan Changes for ACA Enrollment

The IRS issued Notice 2022-41 expanding the permitted change-in-status rules for health coverage under a Code section 125 cafeteria plan.

A cafeteria plan allows an employee to pay for benefits with pre-tax dollars. As a condition of this tax-favored treatment, the cafeteria plan generally must provide that elections are irrevocable, except for certain IRS approved events. A cafeteria plan may allow an employee to revoke an election during a period of coverage and make a new election for the remaining period if, under the facts and circumstances, (i) a change in status occurs and (ii) the change is consistent with the event.

 Under this new guidance, a non-calendar year cafeteria plan may allow an employee to revoke an election of family coverage (prospectively) if

• One or more related individuals are eligible for a special enrollment period to enroll in a qualified health plan through the ACA Marketplace or are enrolling in a qualified health plan through the ACA Marketplace during an open enrollment period; and
• The revocation of the election of coverage under the employer’s plan corresponds to the enrollment of the related individual in the Marketplace coverage no later than the day immediately following the last day of the original coverage being revoked.

This new permitted election change in status rules are effective for elections on or after January 1, 2023. To allow the new permitted election changes, an employer must amend the cafeteria plan accordingly. The changes are intended to coordinate with the new IRS guidance which bases affordability of Marketplace coverage for family members on the cost of employer coverage to the family, not simply the cost to the employee.