The IRS revised the Internal Revenue Code section 125 cafeteria plan rules to add new life event changes. These additional permitted election changes allow an employee to revoke employer-provided coverage to purchase a qualified health plan through the Health Insurance Marketplace.
A Code section 125 cafeteria plan is a written plan sponsored by an employer that allows employees to purchase certain benefits with pre-tax dollars. One of the conditions of getting the tax advantage of a cafeteria plan is that elections must be set for the entire plan year. The Internal Revenue Service allows mid-year election changes in only certain limited circumstances for change in status events. Any change in election must be on account of a recognized IRS change in status event, and the change must be consistent with the event. Cafeteria plans are not required to offer mid-year election changes, but if they do, they must follow the IRS rules.
Under the existing cafeteria plan rules, an employee cannot revoke an election mid-year to enroll in a Marketplace plan. If an employer had a calendar year cafeteria plan, the employee could stop coverage at the end of the year and enroll in the Marketplace plan during the Marketplace open enrollment. However, an employee who participates in a non-calendar year cafeteria plan can not align the end of the employer's plan year with the Marketplace open enrollment period.
The new IRS Notice 2014-55 expands the cafeteria plan change in status to address this problem. A cafeteria plan may allow an employee to revoke an election under a group health plan (not FSA) for two reasons:
1. Revocation of Election Due to Reduction in Hours of Service.
a. The employee has been in an employment status in which he was reasonably expected to average 30 hours per week and there is a change in status so that the employee is expected to average less than 30 hours of service per week (even if the employee is still eligible for coverage); and
b. The revocation of coverage corresponds to the employee’s intended enrollment in another plan that provides minimum essential coverage effective no later than the first day of the second month following the month in which coverage is revoked.
2. Revocation Due to Enrollment in Qualified Health Plan.
a. The employee is eligible for a Special Enrollment Period to enroll in a qualified health plan in the Marketplace (Exchange) or wants to enroll in the Exchange during annual open enrollment; and
b. The revocation of coverage corresponds to the enrollment in the Marketplace coverage beginning no later than the day immediately following the last day the original coverage is revoked.
Employers should note that they can rely on an employee’s representation of intent to enroll in a Marketplace plan, and the employer does not need independent verification. Employers who wish to take advantage of this new permitted election change should amend their plan documents to allow for the change. The guidance is effective immediately.
