The new flexible spending account (FSA) plan year has barely begun and questions have started pouring in about how and when participants may change their plan elections. That’s why I thought this would be a good time to re-examine the change in election rules and point out an update added last year.
The 1.125-4 regulations give a two-pronged approach to determining when a change may be made to an existing election: (1) a change in status or a change in cost or coverage occurs, and (2) the election change satisfies the consistency rule. So first, we’ll look at the conditions for change and then discuss the consistency rule.
Conditions for Change
Seven circumstances apply to accident or health plans (including health FSAs), disability, group term life insurance plans, dependent care assistance, and adoption assistance 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.
There is a new special enrollment right for the gain or loss of Medicaid or state children’s health insurance program (SCHIP) coverage. Coverage can be retroactive if elected within 60 days of the event. This was effective April 1, 2009.
2. Changes in Status Events.
• Change in legal marital status, e.g., marriage, death of spouse, divorce, legal separation and annulment.
• Change in number of dependents, e.g., birth, death, adoption and placement for adoption.
• Change in employment status. Any of the following events can change the employment status of the employee, the employee’s spouse or the employee’s dependent: termination or commencement of employment, a strike or lockout, commencement of or return from an unpaid leave of absence, or a change in worksite. A change in employment status also occurs if an employee, spouse or dependent becomes (or ceases to be) eligible under a cafeteria plan or other employee benefit plan of the employee, spouse or dependent.
• Change in dependent eligibility requirements. This change can occur because of attainment of age, student status or any similar circumstance in which a dependent satisfies or ceases to satisfy requirements.
• Change in residence, e.g., an employee, spouse or dependent moves in or out of a health maintenance organization (HMO) coverage area.
• Adoption, e.g., proceedings begin or terminate under an adoption assistance program.
3. Judgments, Decrees or Orders. Conforming election changes can be made for 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 were to provide coverage or it would allow the participant to cancel coverage if the order required another to provide coverage and it was, in fact, provided by another.
4. Medicare or Medicaid Entitlement. Gain or loss of eligibility would allow the participant to decrease 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 health 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 increases significantly, 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.
• Coverage changes such as significant curtailment of coverage. This type of change allows 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 option is offered.
A loss of coverage means a complete loss of coverage including the elimination of a benefits package option, an HMO 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.
• Coverage change made under another employer plan. This includes changes made during an open enrollment period or a valid change of status for a spouse’s or dependent’s plan.
• Loss of coverage for an employee, spouse or dependent under any group health coverage sponsored by a governmental or educational institution, including an 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 goes from full-time to part-time employment, an employer changes the percentage of premium 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 regulations.
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 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 application under the plan.
There is an exception to the “employer’s plan” rule: If the employee, spouse or dependent becomes eligible for COBRA under the group health plan of the employee’s employer, the plan may permit the employee to increase payments under the employer’s cafeteria plan.
Yet More to Remember
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. So a spouse who goes on an unpaid leave of absence, in which no eligibility change takes place, would not constitute a reason for the participant to change insurance elections.
When a participant gains coverage under another employer’s plan and revokes his election, a certification that coverage was actually selected should be obtained from the employee.
While the regulations allow participants to revoke their election and, on a prospective basis, receive coverage under another benefit package option that provides similar coverage, such coverage need not be provided by the participant’s employer. A plan may treat coverage by another employer (e.g., a spouse’s or dependent’s employer) as similar coverage.
In addition, the “significant cost or coverage changes” section of the regulations doesn’t apply to health FSAs (the unreimbursed medical portion of a cafeteria plan). Employees may change their election to a health FSA only if a valid “condition for change” occurs and the resulting election change satisfies the consistency rule.
So how can you make sure your clients are following all the rules? By selecting one item from Column A and one item from Column B. That is to say—Column A: The IRS’s list of qualifying events for a change in status or change in cost or coverage events are exhaustive. The event must fit into one of the changes outlined in the final regulations. And Column B—The election change is on account of and corresponds with a change in status that affects eligibility for coverage. This is the consistency rule.
A simple reference guide is available at: http://mhmresources.com/ee_02.htm to help you with client questions.
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.
