IRS allows more mid-year group health election changes for cafeteria plans

Sponsors of group health plans under a cafeteria plan (under tax code section 125) may amend the plan to permit participants to make mid-year election changes in two new instances, under recently issued Internal Revenue Service (IRS) guidance. In Notice 2014-55, the IRS expands the situations under which participants may revoke a group health coverage election mid-year, but does not permit such changes for healthcare flexible spending arrangements (health FSAs).

Notice 2014-55 allows the group health plan sponsor to accommodate participants who want to prospectively revoke an election during a plan year in two situations:

1. The participant’s hours have been reduced to the point where they are expected to work fewer than the 30-hour threshold for “full time” work of the Patient Protection and Affordable Care Act (ACA). The change in election is permitted even if the reduction in expected hours worked does not result in the employee ceasing to be eligible under the group health plan.
2. The participant voluntarily chooses to drop employment-based coverage to purchase exchange coverage without having a period of dual or no coverage.

In the first situation, participants must represent to the employer that they will be enrolled in “minimum essential coverage” by the first day of the second month following the revocation date. In the second situation, they must represent that they will be enrolled in exchange coverage by the date immediately following the loss of employment-based coverage. A plan sponsor may rely on participants’ “reasonable” representations of their enrollment statements.

An election to revoke coverage on a retroactive basis is prohibited.

In general, section 125 cafeteria plan sponsors must amend the plan by the last day of the plan year for which the change is effective and operate the plan in accordance with the guidance. For 2014, however, Notice 2014-55 permits plan sponsors to adopt the amendment applicable to the start of the 2014 plan year by the end of the 2015 plan year. Notification to plan participants about the amendment is required.

For additional information about the IRS’s guidance permitting these cafeteria plan changes, please contact your Milliman consultant.

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