As an account manager, one of the most frequent questions I get asked is if an employee can drop their plan mid-year.
The answer–well it depends! Here are the questions you can ask to make a determination:
Is the payroll deduction pre-tax?
If the employee is asking to drop a benefit that is paid by pre-tax payroll deductions, then the answer is no. If you are taking out payroll deductions pre-tax, then you are running a section 125 premium only plan (also called a cafeteria plan). The IRS code Section 125 only allows changes to your elections as a new hire, at open enrollment, or for a mid-year status change.
If the employee is asking to drop the plan due to a mid-year status change, then it’s permitted. However, the requested change must follow the consistency rules. In other words, the election change must correspond with the requested change in status. For example, if an employee requests to drop a plan due to a divorce, the employee may drop the ex-spouse from the coverage, but the employee cannot drop coverage for themselves. The same holds true for the birth of a baby. The baby can be added to the plan, but the employee is not permitted to drop their own coverage.
Lastly, the underlying health plan may have its own set of rules for eligibility. If the carrier allows an employee to drop the plan mid-year in the absence of a mid-year status change, then the employee can drop the coverage, but they still must pay for that coverage until the end of the year. And who wants to do that?
Is the payroll deduction post-tax?
If the employee is asking to drop a benefit that is NOT paid by pre-tax payroll deductions (such as voluntary plan), then they can likely drop the plan at any time. The carrier may still have some restrictions on cancellation and mid-year status changes.
As a reminder, you should have an up to date section 125 plan document that clearly outlines permissible mid-year status changes and when dropping a plan is permitted.
How does this change with the COVID-19 outbreak?
Given the economic impact of the coronavirus pandemic being felt around the country, mid-year changes to plans may be more likely in the weeks to come. If an employee drops to part-time hours or is laid off, generally they are not eligible to continue the benefit plan and should be offered COBRA. However, many carriers are relaxing eligibility rules during the outbreak and are allowing employees to stay on health, dental and vision plans for a period of time, even during a layoff. Employers should check with their trusted employee benefits advisor and carriers on what is currently being offered, or reference this post: Carriers Relax Requirements and Open COVID-19 Special Enrollment Periods.
If an employee is facing financial hardship due to the outbreak, and asks to drop the health plan because they can no longer afford it, at this time Section 125 does not allow them to change their elections due to COVID-19. If the employer is facing financial hardship and opts to increase employee payroll contributions mid-year, that is a change in cost which would allow the employee to drop the plan and discontinue their payroll contributions through the Section 125 plan. For dependent care accounts, if the childcare situation changes due to a change in cost or coverage (i.e. daycare is closed or employee is now staying home to care for child), the employee can change elections or discontinue elections mid-year. Check your plan document for details.