HUMAN CAPITAL PRACTICE
ALERT
November 2014
www.willis.com
IRS EXTENDS CAFETERIA
PLAN CHANGE-INELECTION RULES
The Internal Revenue Service (IRS) issued Notice 2014-55, and
with this guidance, employers may now offer their employees more
opportunities to change their group health plan pre-tax elections.
BACKGROUND
Employers maintain cafeteria plans to allow employees to make
insurance premium payments on a pre-tax basis. In exchange for this
tax benefit to employees, employers must impose strict rules on cafeteria
plan elections, and those elections are generally irrevocable during the
plan year. If certain events occur during the plan year, the plan may
permit certain election changes on a prospective basis if the election
change is made in a timely fashion after the precipitating life event. Plan
sponsors may choose to recognize all, some, or none of the change-inelection events that the IRS permits. I.e., with the issuance of Notice
2014-55, an employer may now choose to either include two additional
change-in-election circumstances in its plan design or leave its cafeteria
plan documents unchanged, not allowing these new freedoms.
One of the hallmarks of the IRS change-in-election rules, specifically those
involving a change in status (marriage, employment, change in residence,
etc.), is that the life event must result in a change in an individual’s
eligibility under the benefit in order for an individual to make a cafeteria
plan election change. For example, if an employee moves to a new home
just a few miles from the employee’s prior home, the employee would
still live in the area with the same network of physicians and the same
health care facilities, and the employee would not lose eligibility under the
plan. Therefore, even though the employee had a change in status event
(the change in residence), the employee’s move did not result in a loss
of eligibility, so the employee would not be permitted to change his/her
elections under the cafeteria plan. However, with the new IRS guidance, a
“change in eligibility” is NOT a requirement in order for the two changein-election events outlined below (though, a “change in eligibility” remains
a continuing requirement for change-in-status events).
Under Health Care Reform’s Pay or Play mandate, large employers (those
with 50 or more full-time employees or full-time equivalent employees)
are required to offer minimum essential coverage to full-time employees,
and that coverage must be affordable and must meet the minimum
actuarial value requirements. Employers not offering such coverage will
“Employers may now offer
their employees more
opportunities to change
their group health plan
pre-tax elections.”
be subject to an excise tax. Employers subject to the Pay or Play mandate must track hours and ensure that eligible “fulltime” employees are offered group health plan coverage. Fluctuation in the workforce is a reality in business, and employee
work hours can also vary. Accordingly, an employee who had been full-time and had worked 30 or more hours each week may
drop hours and technically fall out of the “full-time” employee definition. Some employers have designed their plans so that
an employee may fall below 30 hours, but may still be eligible for benefits under the plan (and certainly, employees who are
in their “stability period” – a term used under the Pay or Play mandate – may have reduced hours during that stability period
without the reduction of hours affecting their eligibility for coverage during the stability period).
Employees with fewer than 30 hours of employment each week may find it difficult or financially undesirable to maintain benefits
and may wish to drop their coverage. Likewise, employees participating in a plan that is not a calendar year plan may prefer to drop
the group health plan coverage and choose coverage under the Exchange. However, benefits provided other than on a calendar
year basis would complicate the employee’s ability to enroll in the Exchange, requiring either a period of dual coverage until the end
of the employee’s group health plan year OR requiring the employee to go without group health plan coverage for a period of time
until the employee is able to enroll in the Exchange during its annual enrollment. In both the reduction-of-hours scenario and the
switching-from-group-plan-to-Exchange scenario, the IRS has chosen to loosen the cafeteria plan rules.
THE GUIDANCE
The guidance below does NOT impact health flexible spending account elections, so the recent loosening of the rules will
not allow an employee to change his/her health FSA election upon the occurrence of a reduction of hours or when the
employee wishes to drop the group health plan coverage for Exchange coverage. The guidance DOES, however, relate to
group health plan coverage that provides “minimum essential coverage” under the Pay or Play mandate.
1. Revoking group health plan coverage due to reduction in hours. If an employee had been reasonably expected to
average at least 30 hours of service per week, but there was a later change in the employee’s status so that the employee
actually averages fewer than 30 hours of service per week, then the employee may revoke coverage (even if the reduction
in hours did not result in the employee ceasing to be eligible under the group health plan). The revocation is only
permitted if the individuals losing coverage because of the revocation receive coverage under another plan that provides
minimum essential coverage, and the new coverage must be in place by the first day of the second month following the
month in which the prior coverage is revoked. The cafeteria plan may rely on the employee’s reasonable representation
that he or she (and any related individuals who are revoking coverage) has enrolled or will enroll in another health plan
that provides minimum essential coverage within the required timeframe.
2. Revoking group health plan coverage due to enrollment in the Marketplace/Exchange. If an employee
qualifies for a Special Enrollment Period to enroll in the Marketplace/Exchange, OR if an employee chooses to
enroll in the Marketplace/Exchange during the Exchange’s annual open enrollment (and the employee’s group
health plan coverage is still in effect and does not coordinate with the Exchange open enrollment), then the group
health plan coverage may be revoked for the employee and his/her dependents, and the individual(s) may enroll in
the Marketplace/Exchange and may choose coverage that is effective no later than the day immediately following
the last day of the prior coverage that was revoked. A cafeteria plan may rely on the employee’s reasonable
representation that the employee and any related individuals who are revoking coverage have enrolled or will
enroll in coverage through the Marketplace within the required timeframe.
This guidance was effective on September 18, 2014 and applies on a prospective basis to revocations of coverage after
September 18, 2014 (plan sponsors may not permit employees to retroactively revoke coverage).
PLAN ACTION
Employers choosing to broaden their cafeteria plan change-in-election rules must amend their existing cafeteria
plan documents to allow the above flexibility. The guidance provides for a special window of opportunity that allows
implementation of this guidance in 2014 as long as the cafeteria plan is amended on/before the last day of the plan year
that begins in 2015. After 2015, the amendment must be adopted on/before the last day of the plan year in which the
changed elections are permitted, and the plan amendment may be effective retroactively to the first day of the plan year.
As always, employers must inform plan participants of this plan change.
Willis North America | November 2014
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KEY CONTACTS
U.S. HUMAN CAPITAL PRACTICE OFFICE LOCATIONS
3
NEW ENGLAND
ATLANTIC
Auburn, ME
207 783 2211
Baltimore, MD
410 584 7528
Bangor, ME
207 942 4671
Knoxville, TN
865 588 8101
Boston, MA
617 437 6900
Memphis, TN
901 248 3103
Burlington, VT
802 264 9536
Metro DC
301 581 4262
Hartford, CT
860 756 7365
Nashville, TN
615 872 3716
Manchester, NH
603 627 9583
Norfolk, VA
757 628 2303
Portland, ME
207 553 2131
Reston, VA
703 435 7078
Shelton, CT
203 924 2994
Richmond, VA
804 527 2343
NORTHEAST
Rockville, MD
301 692 3025
Buffalo, NY
716 856 1100
SOUTHEAST
Morristown, NJ
973 539 1923
Atlanta, GA
404 224 5000
Mt. Laurel, NJ
856 914 4600
Birmingham, AL
205 871 3300
New York, NY
212 915 8802
Charlotte, NC
704 344 4856
Norwalk, CT
203 523 0501
Gainesville, FL
352 378 2511
Radnor, PA
610 254 7289
Greenville, SC
704 344 4856
Wilmington, DE
302 397 0171
Jacksonville, FL
904 562 5552
Willis North America | November 2014
Marietta, GA
770 425 6700
Miami, FL
305 421 6208
Mobile, AL
251 544 0212
Orlando, FL
407 562 2493
Raleigh, NC
704 344 4856
Savannah, GA
912 239 9047
Tallahassee, FL
850 385 3636
Tampa, FL
813 281 2095
Vero Beach, FL
772 469 2843
MIDWEST
Appleton, WI
800 236 3311
Chicago, IL
312 288 7700
Cleveland, OH
216 861 9100
Columbus, OH
614 326 4722
Detroit, MI
248 539 6600
Grand Rapids, MI
616 957 2020
Milwaukee, WI
262 780 3476
Minneapolis, MN
763 302 7131
763 302 7209
Houston, TX
713 625 1017
713 625 1082
Los Angeles, CA
213 607 6300
McAllen, TX
956 682 9423
Phoenix, AZ
602 787 6235
602 787 6078
Moline, IL
309 764 9666
Mills, WY
307 266 6568
Portland, OR
503 274 6224
Overland Park, KS
913 339 0800
New Orleans, LA
504 581 6151
Irvine, CA
949 885 1200
Pittsburgh, PA
412 645 8506
Oklahoma City, OK
405 232 0651
Schaumburg, IL
847 517 3469
San Antonio, TX
210 979 7470
San Diego, CA
858 678 2000
858 678 2132
SOUTH CENTRAL
Wichita, KS
316 263 3211
Amarillo, TX
806 376 4761
WESTERN
Austin, TX
512 651 1660
Fresno, CA
559 256 6212
Dallas, TX
972 715 2194
972 715 6272
Irvine, CA
949 885 1200
Denver, CO
303 765 1564
303 773 1373
San Francisco, CA
415 955 0111
San Jose, CA
408 436 7006
Seattle, WA
800 456 1415
Las Vegas, NV
602 787 6235
602 787 6078
The information contained in this publication is not intended to represent legal or tax advice and has been prepared solely for
educational purposes. You may wish to consult your attorney or tax adviser regarding issues raised in this publication.
Willis North America Inc.
Brookfield Place, 200 Liberty Street, 7th Floor
New York, New York 10281-1003, United States
+1 212 915 8888
www.willis.com
50699/11/14