October 17, 2014
Enrollment: IRS guidance for Section 125 cafeteria plan
On Sept. 18, the Internal Revenue Service (IRS) released guidance to address two situations in which a Section125 cafeteria plan participant is permitted to revoke his or her election during a period of coverage. Normally, a cafeteria plan election is locked in for the duration of a cafeteria plan year and only permits an employee to revoke an election and select other group coverage in certain situations. Prior to this guidance, potential situations could arise where an individual may have no choice but to stay with their group health plan even where a Marketplace qualified health plan (QHP) is a better option.
Under the Sept. 18 guidance, a cafeteria plan may allow an employee to cancel group coverage (1) due to a reduction in hours or (2) to enroll in a Marketplace QHP if certain conditions are met.
- To revoke a cafeteria plan election for group coverage due to a reduction in hours the following conditions must be met:
- Group health plan is not a health flexible spending account (FSA) and provides minimum essential coverage;
- There is a change in the employee’s status such that the employee will reasonably be expected to average less than 30 hours of service per week, even if that reduction does not result in the employee ceasing to be eligible under the group health plan; and
- The revocation of coverage corresponds to the enrollment of the employee and applicable dependents in another plan that provides minimum essential coverage with the new coverage effective no later than the first day of the second month following the month the original coverage is revoked.
- To revoke a cafeteria plan election for group coverage and purchase a Marketplace QHP, the following conditions must be met:
- Group health plan is not a health FSA and provides minimum essential coverage;
- The employee is eligible for a special enrollment period or seeks to enroll in a Marketplace QHP during the annual open enrollment period; and
- The revocation of coverage corresponds to the intended enrollment of the employee and applicable dependents in a Marketplace QHP with new coverage that is effective beginning no later than the day immediately following the last day of the original coverage that is revoked.
This guidance permits, but does not require, a cafeteria plan amendment to adopt the new permitted election changes above on or before the last day of the plan year in which the elections are allowed, and permits the amendment to be effective retroactively to the first day of that plan year, provided that the employer informs participants of the amendment. An election change to permit revocation of coverage on a retroactive basis is not allowed.
A cafeteria plan for a plan year that begins in 2014 may be amended at any time on or before the last day of the plan year that begins in 2015. For example, an employer has until 9/30/16 to amend elections for a plan year that runs 10/1/14 – 9/30/15.
Where can I find more information?
The Treasury Department and the IRS intend to amend Treas. Reg. § 1.125-4 to reflect the guidance in this notice.