It is bound to happen. You have an employee asking to change their payroll deductions for benefit coverage mid-year.
This could be because they welcomed a new baby, they are sending a child off to college who will have access to university coverage, their spouse’s employer is currently doing open enrollment, or they can no longer afford their coverage. Do you know which of these events allows a change, and to what extent?
Cafeteria plans are a mechanism that allows employees to pay for certain expenses, like health insurance and other benefits, with pre-tax dollars. To maintain preferential tax treatment, certain requirements under the Internal Revenue Code must be met.
One change is the irrevocability of participant elections (i.e., participant elections cannot be changed during the 12 month plan year). The IRS does recognize several exceptions, permitting a change in participant elections, allowing employers the option to design their cafeteria plans to permit these change. Being aware of these exceptions, recognized by the IRS and reflected in the cafeteria plan document, is crucial to whether or not you allow your employees to make mid-year changes. Failing to comply can result in the plan not being a cafeteria plan and employees’ election resulting in gross income.
Assuming all the IRS recognized permitted election changes are incorporated into the cafeteria plan documents, let’s examine the four events discussed above:
An Employee Recently Had a Baby
Yes, this is a permitted IRS election change as change in status. Additionally, it is a HIPAA special enrollment right. This employee would be able to make changes to all qualified benefits, including health (Flexible Spending Account) FSAs. Additionally, this is one of the few events that allow retroactive coverage, going back to the date of the birth.
An Employee’s Dependent Is Attending College and Now Has Access to University Coverage
No, this is not by itself a permitted election change. The employee would not be able to remove the dependent from coverage.
An Employee’s Spouse Is Currently in Open Enrollment for His Employer’s Plan
Yes, this is a permitted IRS election change as change in coverage under another employer plan. This employee would be able to make changes to qualified benefits, other than health FSA salary reductions.
An Employee Can No Longer Afford Their Coverage
No, this is not by itself a permitted election change. A change in financial condition by itself is not a permitted election change.
Now that we know what events permit an election change, it is important to ensure the underlying plan documents are in sync. Remember cafeteria plans are merely a mechanism for employees to pay for coverage with preferential tax treatment. The underlying component benefits have their own governing terms for mid-year changes.
Join us on Wednesday, June 13, for a webinar where we will explore these recognized events and how to ensure you are administering your cafeteria plan compliantly.