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IRS Expands Permissible Mid-Year Cafeteria Plan Elections

Posted in Benefits

On September 18, 2014, the IRS issued Notice 2014-55, which expands permissible mid-year election changes under “cafeteria plans” to address two specific situations that have arisen in connection with the implementation of healthcare reform.   Specifically, the notice states that a participant may revoke an election for employer-provided health coverage in two situations, provided certain conditions are satisfied:

(1)        Where the participant’s regular working hours are reduced during the plan year, but for whom the reduction does not affect his eligibility for employer-provided health coverage, and

(2)        Where the participant has a special or annual enrollment opportunity in the Health Insurance Marketplace (formerly, the Exchange) and desires to replace employer-provided health coverage with qualified plan coverage in the Marketplace.

With respect to the first scenario, a participant who has experienced a reduction of hours to less than an average of 30 hours of service per week may be permitted to prospectively revoke an election for employer-provided health coverage, but only if the participant enrolls in another plan (including qualified plan coverage in the Marketplace) that provides minimum essential coverage.  The replacement coverage must be effective no later than the first day of the second month following the month that includes the date on which the coverage is revoked.  It is irrelevant, for these purposes, whether the participant continues to be eligible for employer-provided health coverage following the reduction of hours.  Note, however, this does not mean that employees who forfeit an employer subsidy as a result of a change in employment status (i.e. the cost of participating increases) can revoke an election for such employer-provided health coverage without replacing it.

With respect to the second scenario, a participant who has become eligible for a special enrollment opportunity in the Marketplace or who is currently enrolled in a non-calendar plan year plan but wants to participate in the annual enrollment period in the Marketplace may be permitted to prospectively revoke an election for employer-provided health coverage if the participant enrolls in qualified health plan coverage in the Marketplace.  The replacement coverage must be effective no later than the day immediately following the last day of the coverage that is revoked.

These elections may only be made with respect to health plans that provide minimum essential coverage.  The replacement coverage must also provide minimum essential coverage and cover the participant and all dependents whose prior coverage ceases as a result of the revocation.  For these purposes, the cafeteria plan may rely on the reasonable representation of the participant that he (i) has timely enrolled or intends to timely enroll in such coverage and, (ii) if applicable, is eligible for a special enrollment period on the Marketplace.  It’s not clear, however, what is the effect on the cafeteria plan of a participant’s untimely enrollment in such replacement coverage.

Employers should consider permitting mid-year election changes in accordance with Notice 2014-55.  These changes will provide employees more flexibility in selecting coverage on the Marketplace, without increasing the employer’s exposure for the “play or pay” penalty to the employer.  (Recall, the penalty does not apply if a full-time employee voluntarily elects to forego employer-provided coverage that satisfies the minimum value and affordability requirements of healthcare reform.)

To allow the new permitted election changes under this notice, however, a cafeteria plan must be amended and the employer must notify the participants of the amendment. Generally, the amendment must be adopted on or before the last day of the plan year in which the elections are allowed and may be effective retroactively to the first day of that plan year, provided the cafeteria plan is operated in accordance with this guidance.  However, an amendment relating to the 2014 plan year may be adopted at any time on or before the last day of the plan year that begins in 2015.  Although the amendment may be adopted retroactively to the first day of the plan year, the cafeteria plan may not allow a participant to make a retroactive election to revoke coverage.