Cafeteria Plan Mid-Year Election Changes

Transcription

1 Revised October 2016 Lockton Companies L O C K T O N C O M P A N I E S

2 INTRODUCTION... 1 HSA CONTRIBUTIONS AND 401(K) PLAN CONTRIBUTIONS... 2 SPECIAL ENROLLMENT EVENTS UNDER HIPAA AND CHIPRA... 2 EMPLOYEE OR DEPENDENT BECOMING ELIGIBLE UNDER COBRA OR USERRA... 4 ISSUANCE OF A JUDGMENT, DECREE OR ORDER... 5 ENTITLEMENT OR LOSS OF ENTITLEMENT TO MEDICARE OR MEDICAID... 6 LOSS OF COVERAGE UNDER GOVERNMENTAL PLAN OR PROGRAM... 7 CHANGES TO LEGAL MARITAL STATUS... 8 CHANGE IN NUMBER OF DEPENDENTS CHANGE IN EMPLOYEE S, SPOUSE S OR OTHER DEPENDENT S EMPLOYMENT STATUS DEPENDENT CEASES TO SATISFY ELIGIBILITY REQUIREMENTS EMPLOYEE OR DEPENDENT CHANGES PLACE OF RESIDENCE EMPLOYEE COMMENCES OR RETURNS FROM USERRA LEAVE EMPLOYEE COMMENCES OR TERMINATES ADOPTION PROCEEDING CHANGES IN COST OF COVERAGE CHANGES IN NATURE OR EXTENT OF COVERAGE CHANGE IN COVERAGE UNDER OTHER PLAN CHANGE FROM FULL-TIME TO PART-TIME EMPLOYMENT INTENT TO ENROLL IN MARKETPLACE DURING OPEN OR SPECIAL ENROLLMENT PERIOD NOTES... 32

3 INTRODUCTION: CAFETERIA PLAN MID-YEAR ELECTION CHANGES This matrix summarizes the complex rules governing mid-year changes to salary reduction elections made under a cafeteria plan, under Section 125 of the Internal Revenue Code. Please note that the matrix is only a summary; it does not reflect every nuance to the analysis of election changes under the rules. The situations under which an Employee may make a mid-year change to his or her salary reduction elections under a cafeteria plan are set forth in IRS regulations and in additional IRS guidance (particularly with respect to situations relating to the Affordable Care Act that the IRS has recently determined permit mid-year election changes). The regulations do not require a cafeteria plan to allow Employees to change their salary reduction elections mid-year. However, all or nearly all cafeteria plans permit, by their terms, Employees to make changes to the extent permitted by applicable law. Election changes must be prospective only, except with respect to HIPAA special enrollments on account of acquisition of a new dependent by birth, adoption, or placement for adoption. Note, however, that the 2007 proposed cafeteria plan regulations permit up to a 30-day retroactive enrollment of new Employees provided their pre-tax premium payments for the retroactive coverage are taken from amounts made available to them after their enrollment. The regulations do not dictate, with respect to most events giving rise to an opportunity to change a coverage election, the time within which an Employee must request an election change after the occurrence of the event. The cafeteria plan should describe how much time an Employee has to request an election change. Most plans allow a 30-day window. Federal law requires a 30-day window in limited circumstances, and a 60-day window in others, as described in this matrix. Where this matrix uses the term Plan, we mean the cafeteria plan of the Employee s Employer. Similarly, where it refers to Employer, it means the Employee s Employer, except where the context suggests otherwise. References to he or his include she or hers. A capitalized reference to Employer means the Employee s Employer, as opposed to another employer (such as a spouse s employer). 1

4 Health Savings Account (HSA) contributions: Special Rules for Health Savings Accounts and 401(k) Plans Proposed cafeteria plan regulations require that Employers that permit Employees to make pre-tax contributions to HSAs allow Employees to modify those elections, on a prospective basis, at least monthly. This is because Employees may move, from month to month, in and out of eligibility to make HSA contributions. 401(k) contributions: Where 401(k) contributions are made through a cafeteria plan, the cafeteria plan may permit changes to the contribution election for any reason, on a prospective basis, to the maximum extent permitted by the Tax Code and IRS regulations. Special Enrollment Events under HIPAA or CHIPRA Employee s marriage Birth of a child to, adoption of a child by, or placement of a child for adoption with, the Employee Employee s or dependent s loss of other coverage due to exhaustion of COBRA coverage, loss of eligibility, or the other plan sponsor s termination of contributions Employee or a dependent qualifying for premium subsidies from Medicaid or the Children s Health Insurance Program (CHIP) Employee or dependent losing coverage under Medicaid or CHIP Employee or dependent becoming eligible for a state premium assistance subsidy under the medical plan from Medicaid or CHIP (this is rare) Election change for the following benefit: Medical (see discussion below regarding likely restrictions regarding dental, vision and health FSA coverage) The Plan may permit the Employee to revoke a salary reduction election concerning medical coverage and make a new election mid-year that corresponds with the special enrollment right. Notes: The special enrollment rights triggered by marriage, birth, adoption or placement for adoption are, to some extent, counter-intuitive. The Employee may make enrollment changes that don t necessarily include the new spouse or dependent child. If an Employee has a HIPAA special enrollment event, he may add or change coverage options to the same extent as a similarly situated newly eligible Employee. The Plan may by its terms also permit enrollment of pre-existing dependent children, even though the special enrollment rules themselves don t require enrollment of pre-existing dependent children. If the special enrollment event is one that authorizes retroactive enrollment in the health plan (such as upon birth, adoption, or placement for adoption), the election change may also be made retroactively. HIPAA special enrollment rules facilitate the enrollment of domestic partners (DPs), where a benefit plan covers DPs. Although the domestic partnership is not a marriage, where the Employee could have enrolled a DP earlier but did not and then the DP loses coverage elsewhere (e.g., through his own Employer) for reasons described in the column on the left, the Employee may add the DP (if still eligible) due to the DP s loss of other coverage. The DP need not be a Tax Code dependent for this purpose. 2

5 Election changes as to dental or vision coverage may or may not be permitted here; most dental and vision plans are not subject to the HIPAA special enrollment rules. Election changes as to a Health FSA likely are not permitted, because Health FSAs typically are not subject to HIPAA. The Medicaid and CHIP premium subsidies are not available with respect to high deductible health plans. Under HIPAA, the health plan must allow at least 30 days for special enrollments (60 days if qualifying for premium subsidies or losing coverage under Medicaid or CHIP). See also the Change in Status rules, below. Example #1: Acme Co. provides health coverage for its Employees. Under the plan, Employees may elect either Employee-only coverage or family coverage. Acme also maintains a calendar year cafeteria plan under which qualified benefits, including medical coverage, are funded through salary reduction. Acme s Employee, Aaron, is married to Betty, and they have a child, Carl. In accordance with Acme s cafeteria plan, Aaron elects Employee-only health coverage before the beginning of the calendar year. During the year, Aaron and Betty adopt a child, David. Within 30 days thereafter, Aaron wants to revoke his election for Employee-only health coverage and obtain family health coverage for Betty, Carl and David as of the date of David's adoption. Aaron satisfies the conditions for special enrollment of an Employee with a new dependent. Aaron may enroll in family coverage under Acme s medical plan with coverage effective as of the date of David's adoption. Example #2: The Employer plans and available coverage are the same as in Example 1. Before the beginning of the calendar year, Edward elects Employeeonly medical coverage under Acme s cafeteria plan. Edward marries Francis during the plan year. Francis s Employer, NewCo, offers medical coverage to Newco s Employees and, prior to the marriage, Francis had elected Employee-only coverage. Edward wants to revoke the election for Employee-only coverage under Acme s cafeteria plan, and is considering electing family health coverage under Acme s plan or obtaining family health coverage under NewCo's plan. Acme's cafeteria plan may permit Edward to change his salary reduction election to reflect the change to family coverage under Acme's accident or health plan because the marriage would result in special enrollment rights. Coverage under Acme's accident or health plan would be required to be effective no later than the first day of the first calendar month beginning after the completed request for enrollment is received by the plan. Since no retroactive coverage is allowed in the event of marriage, Edward's salary reduction election may only be changed on a prospective basis. (Edward's marriage to Francis is also a change in status, as discussed later.) 3

6 Employee or Dependent becomes eligible for continuation coverage under COBRA or USERRA Election change for the following benefits: Medical, Dental, Vision, Health FSA The plan may permit the Employee to revoke a salary reduction election and make a new salary reduction election mid-year concerning health coverage to increase payments in order to pay for continuation coverage on a pre-tax basis. Likely scenarios: paying COBRA for a child who is a Tax Code dependent but who has ceased to be considered a dependent child under the plan, OR an active Employee who has a reduction in hours and qualifies for COBRA. An Employee who commences a period of USERRA leave may make an election change to pay the higher premium on a pre-tax basis from regular or differential pay, or may elect to terminate coverage. 4

7 Issuance of judgment, decree or order (including QMCSO) resulting from divorce, legal separation, annulment, or change in legal custody, that requires health coverage of a child who is a dependent of the Employee: Election change for the following benefits: Medical, Dental, Vision, Health FSA The Plan may unilaterally make a mid-year salary reduction election change for Employees, to provide health coverage for an Employee s child, if the order requires coverage under the Employee s health plan. The Plan may permit an Employee to make a mid-year election change to revoke coverage of a child if the order requires the spouse, former spouse or other individual to provide health coverage to the child, and the other person actually enrolls the child. Note: The court orders contemplated here are not limited to Qualified Medical Child Support Orders. Example: Employer Macro maintains a calendar year cafeteria plan that allows employees to elect no health coverage, employee-only coverage, employee-plus-one-dependent coverage, or family coverage. Macro's Employee, Albert, is married to Brianne, and they have one child, Clarisse. Before the beginning of the year, Albert elects employee-only health coverage. Albert divorces Brianne during the year and, pursuant to Albert's divorce agreement with Brianne, Macro's health plan receives a qualified medical child support order (as defined in section 609 of the Employee Retirement Income Security Act of 1974) during the plan year. The order requires Macro's health plan to cover Clarisse. Macro's cafeteria plan may unilaterally change Albert's election from employee-only health coverage to employee-plus-one-dependent coverage in order to cover Clarisse. 5

8 Employee s or dependent s entitlement to Medicare or Medicaid (other than solely for pediatric vaccines): Employee s or dependent s loss of entitlement to Medicare or Medicaid (other than solely for pediatric vaccines): Election change for the following benefits: Medical, Health FSA 1 The Plan may permit the Employee to revoke his salary reduction election and make a new salary reduction election midyear to cancel or reduce health coverage (including reducing contributions to a Health FSA) for such person who becomes entitled to the governmental coverage. Employee may change election to add or increase health coverage (including under a Health FSA) for such person who loses entitlement for the governmental coverage. Notes: It may be permissible, in a case where a dependent loses entitlement to Medicare or Medicaid and is enrolled by the Employee under his Employer s plan, for the Employee to also enroll other eligible dependents who could have been enrolled previously but were not. Where the Employee makes a coverage tier change under this rule (for example, moving from Employee-only to family coverage when a dependent loses Medicare or Medicaid coverage), the rules might be interpreted to allow him to change coverage options, if eligible for the other option. Entitlement to CHIP is not a mid-year election change event under this section. But see the HIPAA special enrollment event rules, above. Loss of CHIP coverage also qualifies as a HIPAA special enrollment event. The Employee has 60 days to make a corresponding election under the plan. 1 Arguably, changes to dental and vision coverage elections are not permitted. 6

9 Employee s, spouse s or other dependent s loss of coverage under any group health coverage sponsored by a governmental or educational institution: A State CHIP program A medical care program of an Indian Tribal government or organization A State health benefits risk pool A foreign governmental group health plan Election change for the following benefits: Medical The Plan may permit the Employee to cancel his salary reduction election mid-year and make a new salary reduction election mid-year to add health coverage for such person. However, the Employee cannot change his Health FSA election. Notes: It may be permissible, in a case where a dependent loses coverage and is enrolled by the Employee under his Employer s plan, for the Employee to also enroll other eligible dependents that could have been enrolled previously but were not. Where the Employee makes a coverage tier change under this rule (for example, moving from Employee-only to family coverage when a dependent loses Medicare or Medicaid coverage), the rules might be interpreted to allow him to change coverage options, if eligible for the other option. Loss of CHIP coverage also qualifies as a HIPAA special enrollment event. The Employee has 60 days to make a corresponding election under the Plan. 7

10 Changes to Employee s legal marital status: Marriage (including same-sex marriage) Death of a spouse Divorce Legal separation Annulment Election change for the following benefits: All Qualified Benefits (including Health FSA) The Plan may permit the Employee to revoke his salary reduction election and make a new election mid-year if: The election change corresponds to the change in status, and The change in marital status either affects someone s eligibility for coverage under a benefit plan, or (in the case of benefits other than health or life insurance) either affects eligibility or dependent care or adoption expense benefits. The only life insurance that can be offered under a cafeteria plan is group-term life insurance for the Employee. Dependent life insurance cannot be offered under a cafeteria plan. However, dependent AD&D insurance may be offered. With respect to health/group term life coverage, an event that increases or decreases the number of an Employee s family members who may benefit from coverage is a status change affecting eligibility. The Employee may also increase his Health FSA election. The Employee may not cancel coverage (or reduce his Health FSA election), except as provided below: If due to a marital status change the Employee or a dependent gains eligibility under a family member plan (a plan made available to a family member by the spouse s or other dependent s Employer), the Employee s mid-year election change under the Plan to cease or reduce his or the dependent s health coverage (or to reduce the Employee s Health FSA election) is acceptable only if the Employee or dependent actually acquires or increases coverage under the family member plan. In this regard, the Employee s certification that the other coverage has been or shortly will be acquired is adequate (unless the Employer knows this information is false). In the case of a marriage, the Employee may make a new election providing for coverage of the Employee and the spouse. The Employee may also increase his FSA benefits. In the case of a divorce or death of a spouse, the Employee may cancel health coverage for the deceased or ex-spouse, but not other dependents. The Employee may also, in such a case, reduce but not increase the Employee s health FSA benefits. In the case of a divorce or death of a spouse, the Employee (and/or other surviving dependents) might cease to be eligible for coverage through the spouse s Employer. In that case the Employee may enroll himself and/or (as applicable) the eligible dependents under the Employer s plan. See also Changes in Coverage Under Other Employer Plan. 8

11 Notes: It appears that where the event leads an Employee to enroll a new dependent under his Employer s plan, the IRS will permit the Employee to enroll other eligible dependents that could have been enrolled previously but were not, even though the change in status event did not literally affect their eligibility. Where the Employee makes a coverage tier change (e.g., switches from Employee-only to Employee-plus-spouse) under this rule he may also change coverage options (e.g., from PPO to HMO), if eligible for the other option. The Employee may increase or decrease group term life insurance coverage or disability or AD&D coverage as a result of a change in marital status. Thus, the consistency rule is more relaxed for group term life insurance, disability and AD&D insurance, in the context of marital status changes. Example #1: ABC Company provides health coverage (including a health FSA) for its Employees through its cafeteria plan. Before the beginning of the calendar year, Jason (an ABC Employee) elects employee-only health coverage under ABC Company s cafeteria plan and elects salary reduction contributions to fund coverage under the health FSA. Jason marries Christa during the year. Christa s employer, 123 Company, offers health coverage to its employees (but not including any health FSA), and, prior to the marriage, Christa had elected employee-only coverage. Now Jason wants to revoke the election for employee-only coverage, and is considering electing family health coverage under his Employer s plan or obtaining family health coverage under Christa s plan. Jason s marriage to Christa is a change in status, pursuant to which Christa has become eligible for coverage under ABC Company s health plan. Two possible election changes by Jason correspond with the change in status: Jason may elect family health coverage under ABC Company s plan to cover Christa and him; or Jason may cancel coverage under ABC s plan, if Christa elects family health coverage under 123 Company s plan to cover them both. Thus, ABC Company s cafeteria plan may permit Jason to make either election change. Jason may also increase salary reduction contributions to fund coverage for Christa under the health FSA. Additional examples on next page 9

12 Example #2: Lori is married to Nathan, and they have one child, Henry. Lori is employed by KC Inc., and KC Inc., maintains a calendar year cafeteria plan that allows Employees to elect no health coverage, employee-only coverage, employee-plus-onedependent coverage, or family coverage. Under the Plan, before the beginning of the calendar year, Lori elects family health coverage for everyone in her family: Nathan, Henry and her. Lori and Nathan divorce during the year and Nathan loses eligibility for coverage under KC Inc. s, Plan. Henry does not lose eligibility for health coverage under KC Inc. s Plan upon the divorce. Lori now wants to revoke her election under the cafeteria plan and elect no coverage. The divorce is a change in status. A change in the cafeteria plan election to cancel health coverage for Nathan is consistent with that change in status. However, an election change to cancel Lori or Henry s health coverage does not satisfy the consistency rule regarding cancellation of coverage for an employee's other dependents in the event of divorce. Therefore, the Plan may not permit Lori to elect no coverage. However, an election to change to employee-plus-onedependent health coverage would correspond with the change in status, and thus the Plan may permit Lori to elect employee-plus-one-dependent health coverage. In addition, if Nathan makes a change to cover Henry under Nathan s employer's plan, then Lori may make a corresponding change to elect employee-only coverage under KC Inc. s Plan. Example #3: Juniper Company provides group-term life insurance coverage as described under Tax Code Section 79. Under Juniper Company s cafeteria Plan, an Employee may elect life insurance coverage in an amount up to $50,000. Juniper Company also maintains a calendar year cafeteria plan under which qualified benefits, including the group-term life insurance coverage, are funded through salary reduction. Mark has a spouse and a child. Before the beginning of the year, Mark elects $10,000 of group-term life insurance coverage. During the year, Mark is divorced. The divorce is a change in status. Either an increase or a decrease in coverage is consistent with this change in status. Thus, Juniper Company s Plan may permit Mark to increase or to decrease his groupterm life insurance coverage. Additional examples on next page 10

13 Example #4: Briar Inc. maintains a calendar year cafeteria plan under which full-time Employees may elect coverage under either a PPO option or an HMO. Jackie elects the employee-only PPO option. During the year, Jackie marries Mike. Mike has two children from a previous marriage, and has family group health coverage in a cafeteria plan sponsored by his employer, Cedar Company. Jackie wishes to change from employee-only PPO coverage to HMO coverage for the family. Mike wishes to cease coverage in Cedar Company's group health plan and certifies to Cedar Company that he will have family coverage under Jackie's plan (and Cedar Company has no reason to believe the certification is incorrect). The marriage is a change in status. Under the consistency rule, Briar Inc.'s cafeteria plan may permit Jackie to change her salary reduction contributions to reflect the change from employee-only PPO to HMO family coverage, and Cedar Company may permit Mike to revoke coverage under Cedar Company s cafeteria plan. 11

14 Changes in the number of an Employee s dependents: Birth Death Adoption or placement for adoption Acquisition of a tax dependent domestic partner, etc. Election change for the following benefits: All Qualified Benefits (including Health FSA) The Plan may permit the Employee to revoke his salary reduction election and make a new election mid-year if: The election change corresponds to the change in status, and The change in number of dependents affects someone s eligibility for coverage under a benefit plan, or (in the case of benefits other than health or life insurance) either affects eligibility or affects dependent care or adoption expense benefits. With respect to health/group term life coverage, an event that increases or decreases the number of an Employee s family members who may benefit from coverage is a status change affecting eligibility. In the case of a birth or adoption, etc., the Employee may make a new election providing for coverage of the Employee and the new dependent. The Employee may also increase his health FSA benefits. In the case of a death of a dependent, the Employee may cancel health coverage for the deceased dependent, but not other dependents. The Employee may also, in such a case, reduce but not increase the Employee s health FSA benefits. If after a birth or adoption, for example, it s possible that the Employee s spouse may wish to enroll the family unit under her employer s plan. In that event, see Changes in Coverage Under Other Employer Plan, later. Notes: It appears that where the event leads an Employee to enroll a new dependent under his Employer s plan, the IRS will permit the Employee to enroll other eligible dependents that could have been enrolled previously but were not, even though the change in the number of dependents did not literally affect their eligibility. Where the Employee makes a coverage tier change (e.g., switches from Employee-only to Employee-plus spouse) under this rule he may also change coverage options (e.g., from PPO to HMO), if eligible for the other option. This is the event under which Employees may add a domestic partner (DP) (and the domestic partner s children, if eligible) to a plan, if the DP and, as applicable, the DP s children is/are the Employee s Tax Code dependents. For dependent care expenses, a dependent ceases to satisfy the Tax Code s definition of dependent therefore changing the number of the Employee s dependents if he or she is no longer considered a qualifying individual under Code 21(b)(1). 12

15 The Employee may increase or decrease group term life insurance coverage or disability or AD&D coverage as a result of a change in the number of dependents as described in this section. Note that the only life insurance that can be offered under a cafeteria plan is group-term life insurance for Employees. Dependent life insurance cannot be offered under a cafeteria plan. However, dependent AD&D insurance may be offered. 13

16 Changes in the Employee s, spouse s or other dependent s employment status: Termination or commencement of employment Strike or lockout Commencement of or return from unpaid leave of absence Change in worksite Change in employment status such as a switch from hourly to salaried, part-time to full-time, or vice versa Election change for the following benefits: All Qualified Benefits (including Health FSA) The Plan may permit the Employee to revoke his salary reduction election and make a new election mid-year if: The change corresponds to the change in employment status, and The change in employment status affects someone s eligibility for coverage under a benefit plan, or (in the case of qualified benefits other than health or life insurance) either affects eligibility or affects dependent care or adoption expense benefits. If due to a change in employment status the Employee or dependent gains eligibility under a family member plan (a plan made available to a family member by the Spouse s or other dependent s Employer), the Employee s election under the cafeteria plan to cease or reduce his or the dependent s health coverage (or reduce his health FSA election) is acceptable only if the Employee or dependent actually acquires or increases coverage under the family member plan. See also, Changes in Coverage Under Other Employer Plan, below. Notes: It appears that where the change in employment status leads an Employee to enroll a new dependent under his Employer s plan, the IRS will permit the Employee to enroll other eligible dependents that could have been enrolled previously but were not, even though the change in status event did not literally affect their eligibility. Where the Employee makes a coverage tier change (e.g., switches from Employee-only to Employee-plus-spouse) under this rule he may also change coverage options (e.g., from PPO to HMO), if eligible for the other option. There is a special rule that applies to terminations followed by rehire. If the rehire occurs within 30 days, the Employer must reinstate the Employee s prior salary reduction elections (cannot allow a new election) or may prohibit the Employee from participating until the next year. If the rehire occurs more than 30 days after the termination, the Employer may treat the Employee like a new hire and permit him to make new elections. The Plan may permit the Employee to increase or decrease group term life insurance coverage or disability or AD&D coverage as a result of a change in employment status described in this section. The only life insurance that can be offered under a cafeteria plan is group-term life insurance for the Employee. Dependent life insurance cannot be offered under a cafeteria plan. However, dependent AD&D insurance may be offered. 14

17 Example #1: Alfaco maintains a calendar year cafeteria plan that allows Employees to elect coverage under an accident or health plan providing PPO coverage and coverage under a health FSA. Prior to the beginning of the calendar year, Bridget elects employee-only PPO coverage, and elects salary reduction contributions of $600 during the year to fund coverage under the health FSA for up to $600 of reimbursements for the year. Bridget s spouse, Carson, has employee-only coverage under an accident or health plan maintained by his employer. During the year, Carson terminates employment and loses coverage under that plan. Bridget now wants to elect family coverage under Alfaco s accident or health plan and increase her health FSA election. Carson's termination of employment is a change in status, and the election change satisfies the consistency rule. Therefore, the Alfaco Plan may permit Bridget to elect family coverage under its accident or health plan and to increase Bridget's health FSA coverage. Example #2: Ed is married to Faith and they have one child, Grace. Ed s employer, Universe Inc., maintains a cafeteria plan under which Employees may elect no coverage, employee-only coverage, or family coverage under a group health plan maintained by Universe Inc., and may make a separate vision coverage election under the cafeteria plan. Before the beginning of the calendar year, Ed elects family health coverage and no vision coverage under Universe Inc.'s cafeteria plan. Faith s employer, Vesper, maintains a cafeteria plan under which employees may elect no coverage, employee-only coverage, or family coverage under a group health plan maintained by Vesper, and may make a separate vision coverage election under the plan. Before the beginning of the calendar year, Faith elects no health coverage and employee-only vision coverage under Vesper's plan. During the year, Faith terminates employment with Vesper and loses vision coverage under Vesper's plan. Ed now wants to elect family vision coverage under Universe Inc.'s group health plan. Faith's termination of employment is a change in status, and the election change satisfies the consistency rule. Therefore, Universe Inc.'s cafeteria plan may permit Ed to elect family vision coverage (covering Ed and Grace as well as Faith) under Universe Inc.'s group health plan. Additional examples on next page 15

18 Example #3: Before the beginning of the year, Harvey elects to participate in a cafeteria plan maintained by his Employer, Star Inc. However, in order to cancel coverage, and by prior understanding with Star Inc., Harvey terminates employment and returns one week later. Under the facts and circumstances, a principal purpose of the termination of employment was to alter the cafeteria plan election, and reinstatement of employment was understood at the time of termination. Accordingly, Harvey does not have a legitimate change in status. However, Harvey's termination would constitute a change in status, permitting a cancellation of coverage during the period of unemployment, if Harvey s original election for the period of coverage was reinstated upon his return (for example, if Star Inc.'s cafeteria plan requires an Employee who resumes employment within 30 days, without any other intervening event that would permit a change in election, to return to the original election). If, instead, Harvey terminates and cancels coverage during a period of unemployment, and then returns to work more than 30 days following termination, the Plan may permit Harvey to return to his election in effect prior to termination, or make a new election. Alternatively, the Plan may prohibit Harvey from returning to the Plan during that plan year. 16

19 Dependent satisfies or ceases to satisfy eligibility requirements: Attains the Plan s limiting age Ceases to satisfy other eligibility requirements Election change for the following benefits: All Qualified Benefits (including health FSA) The Plan may permit the Employee to revoke his salary reduction election and make a new election mid-year if: The change corresponds to the eligibility change of the dependent, or In the case of qualified benefits other than health or life insurance, the change in eligibility affects eligibility for coverage under an employer s plan or affects dependent care or adoption expense benefits. With respect to health/group term life coverage, an event that increases or decreases the number of an Employee s family members who may benefit from coverage is a status change affecting eligibility. Notes: It appears that where a dependent satisfies the Plan s eligibility criteria and the Employee rolls the new dependent under his Employer s Plan, the IRS will permit the Employee to enroll other eligible dependents that could have been enrolled previously but were not. Where the Employee makes a coverage tier change (e.g., switches from employee-only to employee-plus-spouse), under this rule he may also change coverage options (e.g., from PPO to HMO), if eligible for the other option. For dependent care expenses, a dependent ceases to satisfy the Tax Code definition of dependent therefore he ceases to satisfy eligibility for dependent care expenses if he is no longer considered a qualifying individual under Code 21(b)(1). The Employee may increase or decrease group term life insurance coverage or disability or AD&D coverage as a result of a change in employment status described in this section. Note that the only life insurance that can be offered under a cafeteria plan is group-term life insurance for the Employee. Dependent life insurance cannot be offered under a cafeteria plan. However, dependent AD&D insurance may be offered. Example #1: Cameron, a single parent, elects family health coverage under a calendar year cafeteria plan maintained by his employer, Onyx. Cameron and Cameron's 25-year old child, Dara, are covered under Onyx's health plan. During the year, Dara attains age 26 and loses eligibility for coverage. Cameron wants to revoke his election for family health coverage and obtain employee-only coverage. Dara's loss of eligibility for coverage under the terms of the health plan is a change in status. A revocation of Cameron's election for family coverage and new election for employee-only coverage corresponds with the change in status. Thus, Onyx's cafeteria plan may permit Cameron to elect employee-only coverage. 17

20 Example #2: Ashley has one child, Bailey. Ashley s Employer maintains a calendar year cafeteria plan that allows Employees to elect coverage under a dependent care FSA. Prior to the beginning of the calendar year, Ashley elects salary reduction contributions of $4,000 during the year to fund coverage under the dependent care FSA for up to $4,000 of reimbursements for the year. During the year, Bailey reaches the age of 13, and Ashley wants to cancel coverage under the dependent care FSA. When Bailey turns 13, she ceases to satisfy the definition of qualifying individual under section 21(b)(1) of the Internal Revenue Code. Accordingly, Bailey's attainment of age 13 is a change in status that affects Ashley's employment-related expenses. Therefore, Ashley may make a corresponding change under her Employer s cafeteria plan to cancel coverage under the dependent care FSA. 18

21 Employee or dependent changes place of residence: Election change for the following benefits: All Qualified Benefits Other Than Health FSA The Plan may permit the Employee to revoke his salary reduction election and make a new election mid-year if: The change corresponds to the change in residence, and The change in residence affects eligibility for coverage under a benefit plan, or (in the case of qualified benefits other than health or life insurance) either affects eligibility, or affects dependent care or adoption expense benefits. Notes: An effective loss of eligibility is sufficient in this context, even if there s no literal loss of eligibility. For example, an Employee who moves in or out of an HMO service area would be considered to have gained or lost eligibility for the HMO. It appears that where the change in residence leads an Employee to enroll a new dependent under his Employer s plan, the IRS will permit the Employee to enroll other eligible dependents that could have been enrolled previously but were not, even though the change in residence event did not literally affect their eligibility. Where the Employee makes a coverage tier change (e.g. switches from employee-only to family coverage) under this rule he may also change coverage options (e.g. from PPO to HMO), if eligible for the other option. Example: Raintree maintains a calendar year cafeteria plan under which full-time employees may elect coverage under one of three benefit package options provided under an accident or health plan: a PPO option or either of two HMO options for Employees who work in the respective service areas of the two HMOs. Anna, who works in the service area of HMO #1, elects the HMO #1 option. During the year, Anna is transferred to another work location which is outside the HMO #1 service area and inside the HMO #2 service area. The transfer is a change in status (relating to a change in worksite), and, under the consistency rule, the cafeteria plan may permit Anna to make an election change to elect the PPO option or HMO #2 or to cancel accident or health coverage. The change in work location has no effect on Anna's eligibility under Raintree s health FSA, so no change in Anna's health FSA is authorized. 19

22 Employee commencing or returning from USERRA leave: Election change for the following benefits: Medical (including Health FSA), Dental and Vision The Plan may permit an Employee to revoke his salary reduction election and make a new election consistent with his commencement of or return from USERRA leave. Employee commences or terminates an adoption proceeding: Election change for the following Benefits: Adoption Assistance The Plan may permit the Employee to revoke his salary reduction election and make a new election with respect to adoption assistance; he may make an election for adoption assistance if he commences the adoption proceeding, or may terminate his election for adoption assistance if he terminates the adoption proceeding. The Employee may increase or decrease group term life insurance coverage or disability or AD&D coverage as a result of a change in employment status described in this section. Note that the only life insurance benefit that can be offered under a cafeteria plan is group-term life insurance for the Employee. Dependent life insurance cannot be offered under a cafeteria plan. However, dependent AD&D insurance may be offered. 20

23 Changes in cost of coverage: Election change for the following benefits: All Qualified Benefits Other Than Health FSA The Employer may make unilateral, prospective changes in Employees salary reduction elections to increase or decrease the Employees contributions if: The cost of benefits changes during a coverage period, and Under the cafeteria plan, Employees are required to make a corresponding change in their salary reductions. If the cost of a benefit package option significantly increases or significantly decreases during a period of coverage, the Plan may permit the Employee to: Notes: Cancel mid-year his or her election and elect to receive prospective coverage under another benefit package option providing similar coverage (e.g., cancel coverage under PPO option and elect less expensive HMO option), or Cancel all coverage if there s not another option available with similar coverage. There is no guidance on what amounts to a significant change in cost. The COBRA rules allude to a premium payment shortfall as insignificant if it is not more than the lesser of $50 or 10% of the amount due. Conventional wisdom applies this standard to the cafeteria plan context. The cost change may result from an action by either the Employer or the Employee. It appears that where the change in cost leads an Employee to enroll a new dependent under his Employer s plan, the IRS will permit the Employee to enroll other eligible dependents that could have been enrolled previously but were not, even though the change in status event did not literally affect their eligibility. With respect to dependent care assistance, a significant cost increase does not include an increase imposed by a dependent care provider who is a relative of the Employee. Examples on next page 21

24 Example #1: A calendar year cafeteria plan is maintained pursuant to a collective bargaining agreement for the benefit of Maverick s Employees. The cafeteria plan offers various benefits, including PPO health insurance and a health FSA. As a result of mid-year negotiations, premiums for the PPO health insurance are reduced in the middle of the year, insurance co-payments for office visits are reduced under the PPO plan by an amount which constitutes a significant benefit improvement, and an HMO option is added. Under these facts, the reduction in health insurance premiums is a reduction in cost. Accordingly, the cafeteria plan may automatically decrease the amount of salary reduction contributions of affected participants by an amount that corresponds to the premium change. However, the plan may not permit Employees to change their health FSA elections to reflect the mid-year change in copayments under the PPO plan. Also, the decrease in co-payments is a significant benefit improvement and the addition of the HMO option is an addition of a benefit package option. Accordingly, the cafeteria plan may permit eligible Employees to make an election change to elect the PPO plan or the new HMO option. However, the plan may not permit Employees to change their health FSA elections to reflect differences in co-payments under the HMO option. Example #2: Reverse Company maintains a cafeteria plan under which Employees may elect accident or health coverage under either a PPO plan or an HMO. Before the beginning of the year, Reverse Company s Employee, Evelyn, elects coverage under the HMO at a premium cost of $100 per month. During the year, Evelyn, decides to switch to the PPO plan, which charges a premium of $140 per month. Evelyn s change from the HMO to PPO plan is not a change in cost or coverage, and none of the other election change rules apply. Although Reverse Company's health plan may permit Evelyn to make the change from the HMO to the PPO plan, Reverse Company's cafeteria plan may not permit Evelyn to make an election change to reflect the increased premium. Accordingly, if Evelyn switches from the HMO to the PPO plan, Evelyn may pay the $40 per month additional cost on an after-tax basis. Additional examples on next page 22

25 Example #3: Andrew is married to Blair and they have one child, Carrie. Andrew s Employer, Morning Glory, maintains a calendar year cafeteria plan that allows Employees to elect coverage under a dependent care FSA. Carrie attends Valley View's onsite child care center at an annual cost of $3,000. Prior to the beginning of the year, Andrew elects salary reduction contributions of $3,000 during the year to fund coverage under the dependent care FSA for up to $3,000 of reimbursements for the year. Andrew now wants to revoke his election of coverage under the dependent care FSA, because Andrew has found a new child care provider. The availability of dependent care services from the new child care provider (whether the new provider is a household Employee or family member of Andrew or Blair or a person who is independent of Andrew and Blair) is a significant change in coverage similar to a benefit package option becoming available. Because the FSA is a dependent care FSA rather than a health FSA, the coverage rules of this section apply and Morning Glory s cafeteria plan may permit Andrew to elect to revoke his previous election of coverage under the dependent care FSA, and make a corresponding new election to reflect the cost of the new child care provider. Example #4: Daniel is married to Lynn and they have one child, Finn. Daniel s Employer, Newhouse, maintains a calendar year cafeteria plan that allows Employees to elect coverage under a dependent care FSA. Finn is cared for by Kari, Daniel s household Employee, who provides child care services five days a week from 9 a.m. to 6 p.m. at an annual cost in excess of $5,000. Prior to the beginning of the year, Daniel elects salary reduction contributions of $5,000 during the year to fund coverage under the dependent care FSA for up to $5,000 of reimbursements for the year. During the year, Finn begins school and, as a result, Kari's regular hours of work are changed to five days a week from 3 p.m. to 6 p.m. Daniel now wants to revoke his election under the dependent care FSA, and make a new election under the dependent care FSA to an annual cost of $4,000 to reflect a reduced cost of child care due to Kari's reduced hours. The change in the number of hours of work performed by Kari is a change in coverage. Thus, Newhouse's cafeteria plan may permit Daniel to reduce his previous election under the dependent care FSA to $4,000. Additional examples on next page 23

26 Example #5: Garrett is married to Hannah and they have one child, Jake. Garrett s Employer, Onboard, maintains a calendar year cafeteria plan that allows Employees to elect coverage under a dependent care FSA. Jake is cared for by Zoe, Garrett's household employee, who is not a relative of Garrett and who provides child care services at an annual cost of $4,000. Prior to the beginning of the year, Garrett elects salary reduction contributions of $4,000 during the year to fund coverage under the dependent care FSA for up to $4,000 of reimbursements for the year. During the year, Garrett raises Zoe's salary. Garrett now wants to revoke his election under the dependent care FSA, and make a new election under the dependent care FSA to an annual amount of $4,500 to reflect the raise. The raise in Zoe's salary is a significant increase in cost, and an increase in election to reflect the raise corresponds with that change in status. Thus, Onboard's cafeteria plan may permit Garrett to elect to increase his election under the dependent care FSA. Example #6: Pinnacle maintains a calendar year cafeteria plan that allows Employees to elect employee-only, employee-plus-one-dependent, or family coverage under a PPO plan. During the middle of the year, Pinnacle gives its Employees the option to select employee-only or family coverage from an HMO plan. Pinnacle Employee, Jan, who had elected Employee plus-one-dependent coverage under the PPO plan, decides to switch to family coverage under the HMO plan. Pinnacle s midyear addition of the HMO option is an addition of a benefit package option. Jan may change her salary reduction contributions to reflect the change from PPO to HMO coverage, and also to reflect the change from employee-plus-one-dependent to family coverage (however, an election of employee-only coverage under the new option would not correspond with the addition of a new option). Pinnacle may not permit Jan to change her health FSA election. 24

27 Changes in extent or nature of coverage: Election change for the following benefits: All Qualified Benefits Other Than Health FSA Without loss of coverage: If coverage under the Plan is significantly curtailed (but not terminated) during a period of coverage, the Plan may permit the Employee to revoke his salary reduction election mid-year and make a new election for prospective coverage under another coverage option providing similar benefits (canceling all coverage does not appear to be an option). Coverage under a health plan is significantly curtailed only if there s an overall reduction in coverage provided to participants under the Plan so as to constitute reduced coverage to participants generally. Thus, termination of an Employee primary care doctor from the health plan s network is not a significant curtailment. Coverage may be considered significantly curtailed if there is a significant increase in deductible, co-pays, out-of-pocket maximums, etc. With loss of coverage: If the significant curtailment is a loss of coverage, the Plan may permit the Employee to revoke his salary reduction election mid-year and make a new election for prospective coverage under another coverage option providing similar benefits, or elect no coverage if no option with similar coverage is available. Loss of coverage means a complete loss, including an HMO ceasing to provide coverage in the service area. The Plan may also treat the following as losses of coverage: Substantial decrease in providers available under the option (such as a major hospital leaving the network, or a significant number of physicians leaving the network), Reduction in benefit limits for benefits for a specific condition or treatment with respect to which the covered person is currently involved in a course of treatment, and Any similar fundamental or effective loss of coverage. Addition or significant improvement of a benefit option: If the Plan adds or improves a benefit option during a coverage period, the Employee may elect mid-year the newly added or improved option (even if the Employee did not to that point have any coverage). Notes: It appears that where the change in nature or extent of coverage leads an Employee to enroll a new dependent under his Employer s plan, the IRS will permit the Employee to enroll other eligible dependents that could have been enrolled previously but were not, even though the change in coverage did not literally affect their eligibility. For dependent care, finding a new dependent care provider is treated as the addition of a new coverage option. Further, a change in the number of hours worked by a dependent care provider is treated as a change in coverage. 25

28 Example: Princeton Inc. sponsors a calendar year cafeteria plan under which Employees may elect either employee-only or family health coverage. Before the beginning of the year, Princeton Inc., Employee, Charlie, elects family coverage under Princeton Inc. s cafeteria plan. Charlie also elects coverage under the health FSA for up to $200 of reimbursements for the year to be funded by salary reduction contributions of $200 during the year. Charlie is married to Dina, who is employed by Quest. Quest does not maintain a cafeteria plan, but does maintain an accident or health plan providing its employees with employee-only coverage. During the calendar year, Quest adds family coverage as an option under its health plan. Dina elects family coverage under Quest's plan, and Charlie wants to revoke his election for health coverage and elect no health coverage under Princeton Inc.'s cafeteria plan for the remainder of the year. Quest's addition of family coverage as an option under its health plan constitutes a new coverage option. Accordingly, Princeton Inc.'s cafeteria plan may permit Charlie to revoke his health coverage election if Dina actually elects family health coverage under Quest's accident or health plan. Princeton Inc. s plan may not permit Charlie to change his health FSA election. 26

29 Change in coverage under other plan: E.g., open enrollment under spouse s plan that has a different plan year E.g., legitimate (permissible under these rules) change in coverage election under spouse s plan Election change for the following benefits: All Qualified Benefits Other Than Health FSA The Plan may permit the Employee to make a salary reduction change that is on account of and corresponds with a change made under another plan (cafeteria plan or other plan) sponsored by the Employee s Employer or another employer (e.g., a spouse s employer) if: The other plan permits an election change that would be permitted under IRS regulations, (i.e., the other employer allows a change under its cafeteria plan, and the change is permitted by IRS rules), or The cafeteria plan of the Employee s Employer has a different coverage period (i.e., plan year) than the coverage period under the other plan. Example: Neverland sponsors an accident or health plan under which Employees may elect either employee-only coverage or family health coverage. The 12-month period of coverage under Neverland's cafeteria plan begins January 1, Neverland's Employee, Avery, is married to Brian. Avery elects employee-only coverage under Neverland's plan, for a January 1, 2017 effective date. Brian's Employer, Omni, offers health coverage to Omni's employees under its accident or health plan under which employees may elect either employee-only coverage or family coverage. Omni's plan has a 12-month plan year/period of coverage beginning September 1. Brian maintains employee-only coverage under Omni's plan, and wants to elect no coverage for the Omni plan year beginning on September 1, Avery wants to add Brian to her coverage effective September 1, Avery certifies to Neverland that Brian will elect no coverage under Omni's accident or health plan for the plan year beginning on September 1, 2017 and Neverland has no reason to believe that Avery's certification is incorrect. Neverland's cafeteria plan may permit Avery to change her election prospectively to family coverage under that Plan effective September 1,

30 Change from full-time to part-time employment: Employee moves from a position where he is reasonably expected to work at least 30 hours per week, to a position in which he s expected to work fewer hours per week on an indefinite or extended basis. Election change for the following benefits: Qualified Healthcare Benefits Providing at Least Minimum Essential Coverage (will exclude most dental and vision coverage, and most Health FSAs) The Plan may permit the Employee to make a salary reduction change that is on account of and corresponds with a change in employment status where: The Employee has been in a position in which he was reasonably expected to average at least 30 hours of service (as defined under the Affordable Care Act and its regulations) per week, and Changes to a position in which he is reasonably expected to average less than 30 hours of service per week, and The revocation of the Employee s salary reduction election under the Plan corresponds with his intended enrollment of the Employee (and any other individuals who also cease coverage as a result of the Employee s revocation of his election) in other minimum essential coverage, with an anticipated coverage effective date not later than the first day of the second month following the month that includes the date the original election is revoked. Notes: The reduction in hours does not have to affect the Employee s eligibility under the Employer s medical plan. The Employer may accept the Employee s representation regarding intended enrollment in other minimum essential coverage. The other minimum essential coverage does not have to be Marketplace coverage under the Affordable Care Act. It could be governmental coverage (e.g., Medicare Part A) or other employer-based group coverage. Example: Wornall Company maintains a calendar year cafeteria plan that allows Employees to elect coverage under an accident or health plan. John is employed by Wornall Company and has been in an employment status under which John was reasonably expected to average at least 30 hours of service per week. Prior to the beginning of the calendar year plan, John elects family health coverage under the Wornall Company group health plan and elects salary reduction contributions accordingly. On October 1, 2016, John changes positions with Wornall and will reasonably be expected to average less than 30 hours of service per week after the change. John is currently in an ACA stability period in which he is considered an ACA full-time employee, and John continues to be eligible under the Wornall group health plan. 28

31 John wishes to enroll in family coverage under his wife s employer s plan effective November 1, 2016, which provides minimum essential coverage (MEC) for John and all of his dependents currently enrolled under the Wornall Company group health plan. John s reduction in hours is an event permitting a salary reduction election change under the Wornall Company cafeteria plan, and pursuant to the reduction in hours and John s reasonable representation that he and all of his dependents currently covered under the Wornall Company group health plan will be enrolled in other MEC coverage no later than the first day of the second month following the month the original coverage is revoked, Wornall Company s cafeteria plan may by its terms permit John to cancel coverage under the Wornall Company group health plan and reduce his cafeteria plan election accordingly. 29

32 Intent to enroll in marketplace coverage under marketplace special or open enrollment period: Election change for the following benefits: Qualified Healthcare Benefits Providing at Least Minimum Essential Coverage (will exclude most dental and vision coverage, and most Health FSAs) The Plan may permit the Employee to revoke his salary reduction election on account of and corresponding with an intended enrollment in Marketplace coverage where: The Employee is eligible for Marketplace open or special enrollment, and The revocation of the Employee s salary reduction election under the Plan corresponds with his intended enrollment of the Employee (and any other individuals who also cease coverage as a result of the Employee s revocation of his election) in a qualified health plan through a Marketplace, with an anticipated coverage effective date not later than the first day immediately following the last day of the Employer-based coverage that is revoked. Notes: The Employer may accept the Employee s representation regarding intended enrollment in Marketplace coverage. Marketplace special enrollment rights may be triggered by a number of events including: Example #1: Loss of minimum essential coverage Gaining a dependent (or becoming a dependent) through marriage, birth, adoption, placement for adoption or in foster care, or a child support or other court order Gaining status as a citizen or lawfully present alien Gaining eligibility for Marketplace subsidies (or a change in eligibility for cost-sharing reductions) Employer coverage is no longer affordable or no longer provides minimum value for the upcoming plan year Gaining access to Marketplace coverage due to a permanent move, and Other exceptional circumstances as determined by the Marketplace. Allied Company sponsors a health plan for its Employees providing both individual and family coverage. Allied also maintains a cafeteria plan under which qualified benefits, including health coverage, are funded through salary reduction. Both the health plan and cafeteria plan years run from January 1- December

33 Before the beginning of the calendar year plan, Jane elects employee-only health coverage under Allied Company s cafeteria plan and elects salary reduction contributions in accordance with that election. On March 1, 2016, Jane marries Sam. Jane wishes to enroll in family coverage under the Marketplace. Jane s marriage qualifies as a special enrollment event under the Marketplace and an event permitting the Allied Company cafeteria plan, to the extent provided by that Plan, to allow Jane to cancel her coverage under Allied Company s health plan and reduce her current cafeteria plan election accordingly, in order to enroll in Marketplace family coverage. Example #2: Avenue Company sponsors a health plan for its Employees providing both individual and family coverage. Avenue also maintains a cafeteria plan under which qualified benefits, including health coverage, are funded through salary reduction. Both the health plan and cafeteria plan years run from July 1 to June 30. Before the beginning of the plan year, Employee Jim elects employee-only health coverage under Avenue s plan and elects salary reduction contributions for premium payments. On November 30, 2016, during the Marketplace open enrollment period, Jim decides to enroll in Marketplace individual health coverage with coverage beginning January 1, Jim s eligibility and intent to enroll in Marketplace coverage is an event permitting the Avenue Company cafeteria plan to allow Jim to cancel his salary reduction election, to the extent provided by the cafeteria plan. Therefore, if allowed by the cafeteria plan, Jim can cancel his health coverage under the Avenue Company plan and change his current cafeteria plan election accordingly in order to enroll in Marketplace coverage. 31

34 Notes 32

35 Notes 33

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