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Additional Insurance Election Changes Allowed by the IRS

Cafeteria Plan elections are generally irrevocable for the Plan Year, unless one of the very limited IRS approved exceptions applies.  The IRS recently issued  guidance [IRS Notice 2014-55] that adds to the list of these exceptions.

Reduction of Hours Exception

The first new exception involves an employee whose hours of service are reduced below 30 hours per week, but the employee does not lose his or her coverage under the employer’s group health plan.

Prior to the new exception, the employee could only change his or her cafeteria election if the employee lost coverage.  An employee who did not lose coverage would have to continue on the employer’s coverage until the next annual cafeteria open enrollment election period.

An employee in this situation will now be eligible to change (but not drop) coverage if their hours of service are reduced to under 30 hours.  (For example, the employee may want to change to a less expensive policy or become covered under the plan of his or her spouse’s employer.)

In order to change his or her cafeteria election, the employee must represent to the employer that the employee will enroll in other coverage by the first day of the second month following the month in which the original coverage is dropped.  The employer can rely on this representation without further proof.

Public Marketplace Exception

The second new exception involves an employee who enrolls in coverage on a Public Marketplace.   The IRS will now allow the plan to permit the employee to drop their employer provided coverage at any time in order to enroll on the Public Marketplace.

Prior to this new exception, the IRS would have required an employee who purchased coverage on the Public Marketplace to continue to pay for his or her employer coverage until the cafeteria plan’s next open enrollment election period.

This employee will now be able to drop employer coverage in the middle of the cafeteria plan year as long as they represent that they have enrolled on the Public Marketplace, and that the new coverage will begin on the day after the employer’s coverage ends.

Employers are not required to adopt these new exceptions to the irrevocability rule.  Nevertheless, we intend to incorporate this amendment into all of the plans that we provide documents for as part of our restatement process.  If your company does not want to implement these exceptions, you should contact us immediately.

This review is intended primarily to be a brief overview of  recent developments concerning Cafeteria (Section 125) plans and is not intended to be legal, accounting or other professional advice.  Advantage Administrators assumes no liability whatsoever in connection with its use, nor are these comments directed to specific situations.