| Application of the Permitted Change Rules for Health Coverage under a 125 Cafeteria Plan.
In IRS Notice 2014-55 (click here) released on September 18, 2014, the IRS addressed two specific situations in which a Section 125 cafeteria plan participant may cancel his/her group health coverage mid-plan year.
- The first situation involves a participating employee whose hours of service are reduced so that the employee is expected to average less than 30 hours of service per week, but for whom the reduction does not affect the eligibility for coverage under the employer’s group health plan.
- The second situation involves an employee participating in an employer’s group health plan who would like to cease coverage under the group health plan and purchase coverage through an Exchange or Marketplace established by ACA.
The first situation would apply to an employee who experiences a decrease in hours, but remains eligible for the employer’s group health plan. Employee had been in an employment status under which the employee was reasonably expected to average at least 30 hours per week and there is a change in that employee’s status so that the employee will reasonably be expected to average less than 30 hours of service per week after the change, even if that reduction change does not result in the employee ceasing to be eligible under the group health plan. In addition the employee, along with any related individuals, must state intent to enroll in Marketplace coverage or other minimum essential coverage, such as spouse’s group health plan or Medicare. This other coverage will be effective no later than the first day of the second month following the month that includes the date the original coverage is cancelled.
The second situation provides for the ability of an employee to cancel group health coverage mid-year in order to enroll in the Marketplace no later than the day immediately following the last day of the original coverage that is cancelled. Prior to this update, participants were not permitted to revoke group health plan coverage mid-year solely to enroll in a Marketplace plan. For those employees with a calendar year cafeteria plan, employees could enroll in a Marketplace plan during open enrollment period and begin coverage January 1. However, for those employees enrolled in group health plan in a non-calendar year cafeteria plan were essentially locked out of this option. IRS Notice 2014-55 alleviates the problem for non-calendar year plans by allowing them to amend their plan to allow for a Special Enrollment Period. The Special Enrollment Period will allow participants to change their elections mid-year to enroll in a Marketplace plan during the Marketplace open enrollment period.
Other important factors to observe:
- The plan will rely on employee’s representation to enroll in Marketplace plan that will be effective no later than the day immediately following last day of the employer’s plan coverage.
- The plan must be amended to allow for these additional mid-year election changes on or before the last day of the plan year in which the change is to take effect. (Click here to download the amendment)
- The employee’s change is only prospective and under no circumstances can change be allowed retroactively.
- These additional mid-year election changes do not apply to the Health FSA.
- The employee will not be eligible for tax credits in the Marketplace as long as still eligible for the employer’s group health plan.
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