Happy New Year! Benefit plans have started their new plan years and questions are already coming in about how and when participants may change their plan elections. So, it’s a perfect opportunity to review the change in election rules for the most popular benefits plans such as flexible spending accounts (FSAs) (cafeteria) plans, Health Reimbursement Arrangements (HRAs), Health Savings Accounts (HSAs), and parking and transit plans.
The IRS 1.125-4 Regulations outline a two-pronged approach to determining when a change may be made to an existing cafeteria plan election: (1) a change in status or a change in cost or coverage occurs, and (2) the election change satisfies the consistency rules. We’ll first look at the conditions necessary for a change and then discuss the consistency rule.
Although changes to current elections are not required in the plan document, most flexible benefit plan documents allow for election changes throughout the plan year. Please check your plan documents for specific rules surrounding allowable election changes.
Conditions for Change
Seven circumstances allow for changes to accident or health plans (including healthcare FSAs within a cafeteria plan), disability, group term life insurance plans, dependent care assistance, and adoption plans:
1) Special enrollment rights under HIPAA (Health Insurance Portability and Accountability Act). Allows for election changes on a prospective basis in the event of marriage (a HIPAA event). Election changes on a retroactive basis can be made for the HIPAA events of birth, adoption, or placement for adoption if the change is requested within 30 days of the event.
Also, the gain or loss of Medicaid or state children’s health insurance program (SCHIP) coverage in the cafeteria plan can be retroactive if elected within 60 days of the event.
2) Changes in status events.
- Change in legal marital status, such as marriage, death of spouse, divorce, legal separation, and annulment.
- Change in number of dependents which includes birth, death, adoption, and placement for adoption.
- Change in employment status, for example any of the following events that change the employment status of the employee, the employee’s spouse, or the employee’s dependent: A termination or commencement of employment, a strike or lockout, commencement of or return from an unpaid leave of absence, or a change in worksite. In addition, if the employee, spouse, or dependent becomes (or ceases to be) eligible under the cafeteria plan or other benefit plan of the employer of the employee, spouse, or dependent, that event is considered a change in employment status. For example, if a plan only applies to salaried employees and an employee switches from salaried to hourly-paid with the consequence that the employee ceases to be eligible for the plan, then that change constitutes a change in employment status.
- Dependent satisfies or ceases to satisfy eligibility requirements. This change can occur because of attainment of age, student status, or similar circumstance.
- Change in residence whereby an employee, spouse, or dependent moves in or out of a healthcare insurance network coverage area.
- For an adoption assistance program. The commencement or termination of an adoption proceeding.
3) Judgements, decrees, or orders. A conforming election change can be made that results from a divorce, legal separation, annulment, or change in legal custody (including a qualified medical child support order). Such a change would allow an increase to the election if the order was to provide coverage or it would allow the participant to cancel coverage if the order required another to provide coverage and if it was, in fact, provided by another.
4) Entitlement or loss of eligibility to Medicare or Medicaid. Allows participants to decrease or increase an election under an accident or health plan.
5) Significant cost or coverage changes: There are four events that apply to accident or health plans (not including healthcare FSAs), disability plans, group term life insurance plans, dependent care assistance plans, and adoption assistance plans.
Cost changes such as automatic increases or decreases in a qualified plan or significant cost changes. If the cost charged to an employee significantly increases, the employee may revoke an election and change to coverage under another benefit package option or drop coverage under the accident and health plan if no other benefit package option is offered. On the other hand, if the cost charged to an employee decreases significantly, an employee may commence participation in the cafeteria plan for the option with a decrease in cost.
This applies whether the increase or decrease results from an action taken by the employee (switching between full-time to part-time status) or from an employer increasing or reducing the amount of employer contributions for a class of employees.
Coverage changes such as a significant curtailment of coverage under a plan allow participants to revoke their election and, on a prospective basis, receive coverage under another benefit package option that provides similar coverage. A loss of coverage permits participants to revoke their election and elect coverage under another benefit package option or drop coverage under the accident and health plan if no other benefit package is offered. (A loss of coverage means a complete loss of coverage including the elimination of a benefits package option, a network ceasing to be available in the area, by reaching an overall lifetime or annual limitation, a substantial decrease in the availability of medical care providers, a reduction in benefits for a specific type of medical condition or treatment, or any other similar fundamental loss of coverage.)
A coverage change that adds to or improves an existing benefit package option allows eligible employees to revoke their election under the cafeteria plan and elect coverage under the new or improved benefit package. This includes employees who had made no previous election under the cafeteria plan.
A coverage change is made under another employer plan. This includes changes made during an open enrollment period or a valid change of status of spouse or dependent.
A loss of coverage for the employee, spouse, or dependent under any group health coverage sponsored by a governmental or educational institution, including a state’s children’s health insurance program (SCHIP), a medical care program of an Indian Tribal government, the Indian Health Service, a tribal organization, a state health benefits risk pool, or a foreign government group health plan.
These cost or coverage events would include situations in which an employee switches between full-time and part-time employment, an employer changes the percentage of premium that an employee must pay, or a new benefit option is added. The cost charged to an employee is the key factor in determining whether a cost change has occurred.
6) Family and Medical Leave Act (FMLA). Employees may revoke an existing election for group health plan coverage and make another election for the remaining portion of the period of coverage as provided under the FMLA.
7) 401(k) plans. Elections may be modified or revoked in accordance with 401(k) plan documents. Generally, most plan documents allow for changes on any pay period.
Consistency Rule for Accident or Health Coverage
The second part of the equation deals with whether the election change satisfies the consistency rule. The consistency rule applies to each employee, spouse, or dependent separately and basically requires that the election change be on account of and correspond with a change in status that affects eligibility for coverage under an employer’s plan. This includes an increase or decrease in the number of an employee’s family members or dependents who may benefit from coverage under the plan.
One exception to the consistency rule allows a plan to permit the employee to increase payments under the employer’s cafeteria plan if the employee, spouse, or dependent becomes eligible for COBRA under the group health plan of the employee’s employer.
Keep in mind that, under these rules, the change occurs when an employee, spouse, or dependent gains or loses coverage eligibility for accident or health coverage and group term life insurance. Therefore, a spouse that goes on an unpaid leave of absence, where no eligibility change takes place, would not constitute a reason for the participant to change their coverage elections.
When a participant gains coverage under another employer’s plan and revokes his or her election, a certification that coverage was actually obtained should be sought from the employee.
Regulations do allow a participant to revoke their election and receive, on a prospective basis, coverage under another benefit package option that provides similar coverage by another employer, such as a spouse’s or dependent’s employer.
Note, however, that the “Significant cost or coverage changes” section of the regulations do not apply to healthcare FSAs. Employees may only change their election to a healthcare FSA if any of the other five “Conditions for Change” occur and the resulting election change satisfies the consistency rule.
Additional changes allowed for Marketplace enrollment: A change is allowed for employees to prospectively revoke or change an election with respect to an employer’s accident or health plan if the employee wants to begin participation during open enrollment or a Special Enrollment Period, such as marriage or addition of dependent, to a Marketplace Qualified Health Plan (QHP). The new coverage in the QHP must be effective no later than the day immediately following the last day of the original coverage that is revoked.
HRAs, HSAs, Parking and Transportation Accounts, and 401(k) Plans
HRAs: Employees do not elect into HRA plans. Their eligibility for the HRA is based on the criteria outlined in the plan document. For example, the eligible group may be all those that selected a particular employer-sponsored group health plan. However, under certain conditions, participants in the HRA may suspend their participation in the HRA before the HRA coverage period begins and forgo payment or reimbursement by the HRA to perhaps participate in an HSA or to seek Premium Tax Credits for marketplace insurance coverage. Employees may also switch from single to family insurance coverage, or vise/versa. Employers may make changes to their HRA plans at any time during or at the beginning of the plan year.
HSAs and Parking and Transit Plans: It’s a lot less complicated for participants that have an HSA or are enrolled in parking and/or transit plans. Basically, an election in any of these types of accounts may be increased or decreased for any reason on a prospective basis.
401(k) Plans—inside and outside of a cafeteria plan: Election, generally, can be changed on a per payroll basis without any sort of status change. The selection of the types of investment options for HSAs or 401(k) plans can be changed at any time from the plans’ portals.
Lastly, there may be one more avenue for changing an election to a cafeteria plan—when a mistaken election occurs. This would require clear and convincing evidence that a change is needed. For example, if a participant signed up for the dependent care benefit, thinking it was for healthcare expenses of a dependent, although no child under the age of 13 resides in their home.
Of course, plan documents must be consulted to see when and how changes to elections may be made for any particular benefit plan.
The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.