The Affordable Care Act can be very confusing, especially as it pertains to the recent Transition Relief legislation. The information below should help to clarify some of the nuances of the ACA Transition Relief for mid-year election changes with cafeteria plans.
- Participant elections under a cafeteria must be made before the first day of the plan year or the date taxable benefits would currently be available, whichever comes first. Participant elections generally must be irrevocable until the beginning of the next plan year. This means that participants ordinarily cannot make changes to their cafeteria plan elections during a plan year.
- Employers do not have to permit any exceptions to the election irrevocability rule for cafeteria plans. However, IRS regulations allow an employer to design its cafeteria plan to permit employees to change their elections during the plan year if certain conditions are met. The IRS regulations list the permitted election change events that may be cause for a mid-year election change.
This Legislative Brief provides an overview of the IRS’ permitted election change events. It also includes information on the transition relief available to an employer with a cafeteria plan that has a non-calendar year plan year beginning in 2013. This transition relief was made available due to the Affordable Care Act (ACA) changes that will become effective on Jan. 1, 2014.
Cafeteria plans may recognize certain events as entitling a plan participant to change his or her elections (if the change is consistent with the event). A cafeteria plan may not be more generous than the IRS permits, but it may choose to limit to a greater extent the election change events that it will recognize.
If a cafeteria plan incorporates one or more of the change in status rules, an employee who experiences a change in status is permitted to revoke an existing election and make a new election consistent with the event for the remaining portion of the period of coverage, but only with respect to cash or other taxable benefits that are not yet currently available.
Only an employee of the employer sponsoring a cafeteria plan is allowed to make, revoke or change elections in the employer’s cafeteria plan. The employee’s spouse, dependent or any other individual other than the employee may not make, revoke or change elections under the plan.
Also, a cafeteria plan sponsor that recognizes one or more mid-year election change events provided for in the IRS regulations should review its plan document to confirm it includes the permitted election changes.
PERMITTED ELECTION CHANGE EVENTS
Cafeteria plans may recognize the following events as entitling an employee to make election changes during a plan year.
Change in Status: The IRS considers the following events to be changes in status if they affect eligibility for coverage under an employer’s plan:
- Change in employee’s legal marital status (including marriage, death of spouse, divorce, legal separation and annulment);
- Change in number of dependents (including birth, death, adoption and placement for adoption);
- Change in employment status of employee, employee’s spouse or employee’s dependent (including termination or commencement of employment, commencement of or return from an unpaid leave of absence, and a change in worksite);
- A dependent’s satisfying or ceasing to satisfy dependent eligibility requirements (including attainment of age, student status, or any similar circumstance);
- Change in place of residence of the employee, spouse or dependent; and
- Commencement or termination of adoption proceedings, for purposes of adoption assistance provided through a cafeteria plan.
Cost Changes: If the cost of a plan increases or decreases during a period of coverage, and under the terms of the plan, employees are required to make a corresponding change in their payments, the cafeteria plan may automatically make a prospective increase or decrease in affected employees’ elective contributions for the plan. This change must be made on a reasonable and consistent basis for plan participants.
Significant Cost Changes: If the cost charged to an employee for a benefit package option significantly increases or significantly decreases during a period of coverage, the cafeteria plan may permit the employee to make a corresponding change in election under the cafeteria plan.
Significant Curtailment of Coverage: If an employee or an employee’s spouse or dependent has a significant curtailment of coverage under a plan during a period of coverage, the plan may permit the employee to revoke his or her election for that coverage and to elect coverage on a prospective basis under another benefit package option, providing similar coverage is available.
Addition or Improvement of Benefit Package Option: If a plan adds a new benefit package option or other coverage option, or if coverage under an existing benefit package option or other coverage option is significantly improved during a period of coverage, the cafeteria plan may permit eligible employees to revoke their election under the cafeteria plan and to make an election on a prospective basis for coverage under the new or improved benefit package option.
Change in Coverage of Spouse or Dependent under another Employer Plan: A cafeteria plan may permit an employee to make a prospective election change that is on account of and corresponds with a change made under another employer plan if the other plan allows an election change that is permissible under the IRS regulations, or when the other employer plan has a different period of coverage.
Loss of Certain Other Health Coverage: A cafeteria plan may permit an employee to make an election on a prospective basis to add coverage under a cafeteria plan for the employee, spouse or dependent if they lose coverage under any group health coverage sponsored by a governmental or educational institution. This includes overage under a state Children’s Health Insurance Program (CHIP).
Changes in 401(k) Contributions: A cafeteria plan may permit an employee to modify or revoke elections related to a 401(k) plan, in accordance with Internal Revenue Code sections 401(k) and (m).
HIPAA Special Enrollment Rights: A cafeteria plan may permit an employee to revoke an election for coverage under a group health plan during a period of coverage and make a new election that corresponds with the special enrollment rights provided under HIPAA.
COBRA Qualifying Event: A cafeteria plan may permit the employee to elect to increase payments under the employer’s cafeteria plan in order to pay for the continuation coverage for which an employee, spouse or dependent has become eligible.
Judgments, Decrees or Orders: A cafeteria plan may change the employee’s election to provide coverage for a child if a judgment, decree or order requires coverage for the child under the employee’s plan, or permit the employee to cancel coverage for the child if an order requires another individual to cover the child.
Entitlement to Medicare or Medicaid: If an employee, spouse or dependent becomes entitled to coverage under Medicare or Medicaid or loses such entitlement, the cafeteria plan may permit the employee to make a prospective election change to cancel/reduce or reinstate/increase coverage under the accident or health plan.
FMLA Leave: An employee taking leave under the federal FMLA may revoke an existing election of accident or health plan coverage and make such other election for the remaining portion of the period of coverage as may be provided for under the FMLA.
Pre-tax HSA Contributions: If HSA contributions are made through salary reduction under a cafeteria plan, employees may prospectively elect, revoke or change salary reduction elections for HSA contributions at any time during the plan year with respect to salary that has not become currently available at the time of the election.
ACA TRANSITION RELIEF
The ACA’s individual mandate and the availability of coverage through an Exchange are both effective as of Jan. 1, 2014. This date may raise issues for plans that do not have a Jan. 1 plan year, which the IRS calls “fiscal year plans.” An employee who is eligible to enroll in an employer’s plan, but did not do so, may wish to enroll in the employer’s plan in the middle of the plan year to meet the individual mandate requirements. An employee who is already covered under a fiscal year plan might wish to discontinue coverage under that plan and enroll in an Exchange plan in the middle of the plan year.
To take into account these ACA changes, the IRS has provided a transition rule for sponsors of fiscal year cafeteria plans. Under this rule, an employer may amend its cafeteria plan to permit either (or both) of the following changes in salary reduction elections, which apply regardless of whether employees experience a change of status event:
- An employee who made a salary reduction election through his or her employer’s cafeteria plan for health plan coverage with a fiscal year beginning in 2013 can prospectively revoke or change his or her election regarding the plan during that plan year.
- An employee who did not make a salary reduction election under his or her employer’s cafeteria plan for health plan coverage with a fiscal deadline beginning in 2013 (before the applicable deadline under the cafeteria plan regulations) can make a prospective salary reduction for coverage on or after the first day of the cafeteria plan’s 2013 plan year.
These changes are permitted only once during the plan year, and only with respect to accident and health plan coverage offered under a fiscal year plan.
Also, any cafeteria plan amendment adopted under this transition rule may be more restrictive than the amendments described above, but may not be less restrictive. For example, an employer may amend its cafeteria plan to allow an employee to prospectively revoke or change his or her election once during a limited period (for example, the first month of 2014 only, rather than the entire plan year), regardless of whether the employee experienced a change in status event.
Employers that wish to allow the change in election rules permitted under this transition relief must incorporate the rules in their written cafeteria plans. Cafeteria plans can be amended retroactively to implement these transition rules. The retroactive amendment must be made by Dec. 31, 2014, and must be effective retroactively to the date of the first day of the cafeteria plan’s