Participants in a section 125 cafeteria plan generally are unable to make mid-year plan changes without experiencing a qualified change in status such as marriage, the birth of child or a change in employment status that affects benefit eligibility.
Given these restrictions, new coverage requirements under the Affordable Care Act (ACA) posed challenges for employees who pay health insurance premiums with pre-tax dollars through a premium-only plan. The IRS has addressed those challenges in Notice 2014-55.
The notice effectively permits a cafeteria plan to allow employees to cancel their group health plan under two scenarios.
The first situation involves a participating employee whose hours of service are expected to average less than 30 hours of service per week; however, the reduction does not affect eligibility for the employer’s group health plan. Under new ACA rules, once variable-hour employees are eligible for health insurance, they must be offered coverage for the length of a stability period (a period of 6 to 12 months), even if the employees’ hours are expected to average less than 30 hours of service per week. Prior to ACA, a loss of hours generally would result in a change in status, resulting in a loss of coverage.
The new section 125 change recognizes that if an employee has a loss of hours, while it may not change his or her benefit eligibility, it could be financially impossible to pay ongoing premiums. The new provision allows a plan participant to cancel health coverage in this situation and not violate IRS rules. However, the IRS does not permit a participant to drop coverage altogether. Instead minimum essential coverage must be obtained through the Health Insurance Marketplace or other source.
Example 1 – Hours of service averaging less than 30
Employee A works as a server for a restaurant chain. Following a 12-month look-back measurement period, Employee A worked an average of 30 hours a week, and his employer offered him health insurance coverage because he obtained full-time status. Employee A enrolled in coverage and paid his premiums with pre-tax dollars through his employer’s section 125 plan. Under the new ACA rules, Employee A was entitled to stay on the plan for a subsequent 12-month stability period, regardless of the hours he worked going forward. Shortly after Employee A enrolled in coverage, he began working less than 30 hours a week. While he was entitled to stay enrolled in the coverage, he was unable to afford his share of the insurance premium. If his employer adopted the new cafeteria plan rules, Employee A could cancel his employer coverage, provided he represents that he has or will obtain other minimum essential coverage.
The second situation involves an employee participating in an employer’s group health plan who would like to cease coverage under the group health plan and purchase coverage through a Health Insurance Marketplace during annual open enrolment or during a special enrollment period.
Example 2 – Health Insurance Marketplace enrollment
Employee B enrolled in her employer’s health insurance plan with a July 1, 2014, through June 30, 2015, plan year. She paid her premiums with pre-tax dollars through her employer’s section 125 plan. During the Health Insurance Marketplace open enrollment season (November 15, 2014, through February 15, 2015), Employee B finds less expensive coverage. Employee B enrolls in Marketplace coverage with a January 1, 2015, effective date. If her employer has adopted the new cafeteria plan rules, Employee B could cancel her employer coverage December 31, 2014, provided she represents that she has or will obtain other minimum essential coverage.
In both scenarios, the notice permits a plan to rely on the “reasonable representation” of the employee that he or she has or intends to enroll in other coverage no later than the first day of the second month following the month coverage was revoked.
Under no circumstances may a participant elect to revoke coverage on a retroactive basis.
The IRS guidance requires a cafeteria plan amendment to allow the additional election changes. The amendment must be adopted on or before the last day of the plan year in which the elections are allowed, can be made retroactive to the first day of the plan year, and must be publicized to participants. Also, a cafeteria plan may be amended to adopt the election changes for a plan year that begins in 2014 at any time on or before the last day of the plan year that begins in 2015.
For more information, please contact your dedicated benefits consultant at 913.345.0440.