Section 125 Cafeteria Plans: Take Note of Recent IRS Changes

Employers should be consciously aware of the recent changes implemented by the IRS affecting employers who offer their employees health care coverage under a Section 125 cafeteria plan. The recent implementation of new legislation now broadens an employee’s ability to relinquish coverage during the plan year. The purpose of the legislation is to accommodate the employees’ needs by allowing them to change the elected coverage.

Why the Change?

Prior to these new rules, employees in cafeteria plans were only allowed to elect their coverage at the beginning of the plan year. Furthermore, they were only allowed to change their elections for specific reasons. Exempli gratia, a change involving employment status — going from full-time to part-time — causing the employee to surrender eligibility for coverage under the group health plan.

Other Options

The IRS, in September 2014, proposed two additional factors under which employees can relinquish their group medical coverage during the plan year:

  1. The employee’s anticipated hours of service will decrease from at least 30 hours per week to less than 30 — even if he or she is still eligible for coverage under the organization’s group health plan. Nevertheless, as provided by the Affordable Care Act (“ACA”), the employee and any of the employee’s relatives whose coverage will be lost, must purport to enroll in another health care plan that provides minimum essential coverage.

In implementing the change, employers can place reliance on the employee’s assertion that he or she has enrolled, or intends to enroll, in another plan. The effective date of the new coverage must be by the first day of the second month, after the month in which the employee ceases employer-sponsored coverage.

  1. The employee is eligible and aims to enroll, along with any relatives who will also lose coverage, in a qualified health plan supplied through a Health Insurance Marketplace as provided by the ACA.

Furthermore, the employer can rely on the employee’s affirmation that he or she either has, or intends to, participate in such a plan. With that being said, coverage must begin no later than the day immediately following the last day of the revocation of coverage.

Plan Amendments

Employers are not required to alter their cafeteria plans to allow these changes, however, the employers have the ability to make amendments should they deem them necessary.  If employers decide to amend their plans, they must do so by the end of the plan year in which the elections will be allowed. Employers must alert plan participants of the plan amendments.

Work with a Trusted Advisor

Your benefits advisor is able to provide guidance on the various rulings and their effects on your organization’s benefit plans.  Furthermore, they can provide input in coping with the complexity of these regulations, as well as others pertaining to health care plans.

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