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Dropping a Plan Mid-Year

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.

Click here to download the infobrief: What is a Section 125 Plan and Who Needs One?
 

For additional questions on the section 125 plan document, connect with your OneDigital consultant for assistance.

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