WELCOME! Sec$on 125 Mid-­‐Year Elec$on Changes I May 26, 2016 Sara Tountas, JD I Dir. of Health Reform and Benefits Compliance, Acrisure LLC Disclaimer: The informa,on in this presenta,on is intended for informa,onal purposes only and should not be considered legal advice. The content cannot be used for avoiding Federal tax related penal,es, or promo,ng, marke,ng or recommending anything that is tax-­‐related. You are strongly encouraged to consult your own legal counsel and tax advisors to ensure compliance with applicable law.
Agenda •  SecGon 125 Basics •  General ElecGon and Irrevocability Rules •  Permissible Mid-­‐Year ElecGon Changes: •  Change in Status Events •  Cost or Coverage Changes •  Other Laws, Court Orders, Etc. SecGon 125 Basics •  What is a SecGon 125 plan? •  A SecGon 125 (or “cafeteria”) plan is a program employers can use to help employees pay for certain benefits with pre-­‐tax dollars •  Reduces employee taxable wages •  Reduces employer payroll taxes SecGon 125 Basics •  Every silver lining has a cloud… •  Program must meet certain legal requirements under SecGon 125 of the Internal Revenue Code to avoid “construcGve receipt” •  Legal plan document required •  Only certain benefits may be offered •  ParGcipant elecGons must be prospecGve and are generally irrevocable for the coverage period (generally the 12 month plan year)—with limited excep1ons SecGon 125 Plan Document Requirements •  Plan must include a descrip$on of: •  Available benefits •  ParGcipaGon rules •  ElecGon procedures and restricGons •  Manner of contribuGons •  Maximum contribuGons •  Plan year •  FSA and/or DCAP provisions (if applicable) What Benefits Can be Offered Under a SecGon 125 Plan? •  Qualified nontaxable benefits, including: •  Accident or health coverage excludable from income under Code § 106 •  TradiGonal group health coverage (medical, dental, vision) •  Certain specified illness/fixed indemnity coverage •  Disability coverage* •  Medical flexible spending accounts •  COBRA premiums •  Dependent care assistance programs •  Group term life insurance (up to $50,000 for employee) •  401(k) elec1ve deferrals (uncommon) •  Health savings accounts •  Adop1on assistance benefits General SecGon 125 ElecGon Rules •  Plan document must describe elecGon procedures •  How elecGons are made (affirmaGve, default, rolling/evergreen) •  When elecGons must be made •  Irrevocability rule, and any permieed excepGons General SecGon 125 ElecGon Rules •  ElecGons generally must be made prospec$vely •  During annual open enrollment; •  During mid-­‐year enrollment window for new hires; or •  During mid-­‐year enrollment window for parGcipants who have a permieed mid-­‐year elecGon change event General SecGon 125 ElecGon Rules •  Two excepGons to the prospecGve elecGon requirement: •  Limited 30-­‐day iniGal enrollment window for new hires •  Special enrollment for birth, adopGon, placement for adopGon General SecGon 125 ElecGon Rules •  Plan must provide that elecGons are irrevocable for the coverage period (generally, the 12-­‐month plan year, or as otherwise permieed under the permieed elecGon change rules) •  ElecGons must be irrevocable by the earlier of: •  The date the taxable benefits (e.g., cash) become currently available; or •  The first day of the coverage period Permieed Mid-­‐Year ElecGon Changes •  Excep$ons to the general irrevocability rule •  IRS regulaGons and other formal guidance recognize certain events as permijng mid-­‐year elecGon changes •  Three broad categories: •  Change in status events •  Cost or coverage change events •  Other laws or court order events Permieed Mid-­‐Year ElecGon Changes •  SecGon 125 plans do not have to allow mid-­‐year elecGon changes •  May allow some or all permieed elecGon change events, but must do so in accordance with IRS regulaGons •  May be more restricGve, but never more liberal •  ElecGon change is only allowed if permieed event has occurred AND the requested change is “consistent” with the event Checklist for SecGon 125 Mid-­‐Year ElecGon Change Requests •  Has a permieed elecGon change event occurred? •  Does the event allow an elecGon change for the underlying benefit at issue? •  Does the requested change saGsfy the consistency requirement? •  Is the event recognized under the SecGon 125 plan document? •  Is the requested change permieed under the terms of the insurance policy/plan document for the underlying benefit plan? •  Has the parGcipant completed an elecGon change form cerGfying that: •  The event has occurred; •  The requested change is consistent with the event; •  If coverage is being dropped, that other coverage has been (or will be) obtained? •  Has the elecGon change request been made within the Gme limit specified under the plan? Change in Status Events • 
• 
• 
• 
• 
• 
Change in legal marital status Change in number of dependents Change in employment status Dependent gain/loss of eligibility Change in residence Commencement or terminaGon of adopGon proceedings Change in Status Events •  Most common requested elecGon changes •  Applies to elecGons for all qualified benefits, including FSAs •  Consistency rule for change in status events provides that elecGon change is not allowed for accident or health coverage unless the event affects eligibility •  But elecGon changes are allowed for life, disability, AD&D even if event does not affect eligibility Change in Status: Change in Legal Marital Status •  Change in legal marital status includes: •  Marriage, divorce, death, legal separaGon, annulment •  Both same-­‐sex and opposite-­‐sex legal marital changes qualify •  Marriage also triggers HIPAA special enrollment rights (another permieed elecGon change event—discussed later) Change in Status: Change in Number of Dependents •  Change in number of dependents includes: •  Birth, adopGon, placement for adopGon, or death •  “Dependent” generally means a tax dependent •  Will also include child who has not aeained age 27 as of the end of the year •  For DCAP coverage, dependent means a “qualifying individual” under Code § 21(b)(1) Change in Status: Change in Employment Status •  Change in employment status includes any of the following changes (with respect to the employee, spouse or dependent) that affects eligibility: • 
• 
• 
• 
• 
TerminaGon or commencement of employment; Strike or lockout; Commencement or return from unpaid leave; Change in worksite; Any other change in employment status which results in gaining or losing eligibility (e.g., full-­‐Gme to part-­‐Gme) Change in Status: Dependent Gain/Loss of Eligibility •  Includes an event that causes a dependent to saGsfy or cease to saGsfy the eligibility requirements for coverage due to aeainment or a certain age, loss or gain or student status, marriage or similar circumstances •  Post-­‐ACA, child under age 26 will not lose eligibility under medical plan due to marriage or loss of student status (but eligibility for dental, vision, other benefits could be affected) Change in Status: Change in Residence •  Includes a change in place of residence of an employee, spouse or dependent that affects eligibility •  Somewhat rare, but would apply if: •  Coverage is lost upon moving out of the HMO service area; or •  Become eligible for new/different coverage opGon due to change in residence Change in Status: Commencement or TerminaGon of AdopGon Proceedings
•  Allows an elecGon change under an adopGon assistance program Change in Status Events: The Consistency Requirement •  General consistency rule: requested change must be “on account of and correspond with” a change in status that affects eligibility under an employer’s plan Change in Status Events: The Consistency Requirement •  Special consistency rules: •  “Relaxed” rule for life, disability, AD&D coverage elecGon changes •  Special rule allowing DCAP elecGon changes where dependent care expenses are affected •  Special rule limiGng elecGon changes permieed upon divorce, legal separaGon, annulment, death or spouse or dependent, or dependent ceasing to saGsfy eligibility requirements •  Special rule limiGng elecGon changes due to gain in eligibility under family member’s plan Change in Status: The Consistency Requirement •  “Relaxed” rule for life, disability, AD&D coverage: •  ParGcipant may increase or decrease coverage for any change in status event, even if eligibility is not gained or lost Example: Paul is married and elects group term life insurance under his employer’s plan equal to his annual salary. During the year, Paul has a child– which does not affect his eligibility for group term life insurance. Nonetheless, Paul can increase or decrease his life insurance coverage as a result of the change in status event. Change in Status: The Consistency Requirement •  Special rule for dependent care expenses: •  Consistency rule is saGsfied if DCAP elecGon change is on account of and corresponds with a change in status that affects the eligibility for dependent care tax exclusions under Code §129 even if event does not affect eligibility •  Examples: •  Child turns age 13; •  Employee or spouse have a change in employment status that affects eligibility for tax exclusion Change in Status: The Consistency Requirement •  Special rule for loss of spouse or dependent eligibility (due to divorce, legal separaGon, annulment, death or dependent ceasing to saGsfy eligibility requirements) •  Employee can only cancel accident or health coverage for spouse or dependent (as applicable)
—not for anyone else. Change in Status: The Consistency Requirement •  Special rule for loss of spouse or dependent eligibility— EXAMPLE: Edna is married to Fred and they have a child, George. Edna enrolls in family medical coverage under her employer’s SecGon 125 plan. During the year, Edna and Fred divorce and Fred loses eligibility under Edna’s plan. George, however, does not lose eligibility. Edna wants to revoke her elecGon and elect no medical coverage. RESULT: Edna can cancel Fred’s coverage, but not coverage for herself and George. Change in Status: The Consistency Requirement •  Special rule for if employee, spouse or dependent gains eligibility under another employer’s plan (as a result of change in marital or employment status) •  ElecGon to cease or decrease coverage for the individual is only consistent if individual actually obtains (or increases) coverage under the other employer’s plan •  Employer can rely on employee’s cerGficaGon that coverage has been (or will be) obtained/increased so long as it has no reason to believe the cerGficaGon is incorrect Change in Status: The Consistency Requirement •  Special rule for if employee, spouse or dependent gains eligibility under another employer’s plan– EXAMPLE Bob elects employee-­‐only medical coverage under his employer’s SecGon 125 plan before the beginning of the year. During the year, Bob marries Cindy. Cindy has two children from a previous marriage and is currently enrolled in family coverage under her employer SecGon 125 plan. Cindy wants to terminate medical coverage for herself and her children and have Bob enroll them all in family coverage under Bob’s employer’s plan. RESULT: Cindy’s employer may allow the elec1on change so long as Cindy cer1fies to her employer that she has (or will) enroll herself and her children under Bob’s employer’s plan (and Cindy’s employer has no reason to believe the cer1fica1on is incorrect). Change in Status: The Consistency Requirement •  The general consistency rule: the elecGon change must be on account of and correspond with a change in status event that affects eligibility for coverage under another employer’s plan •  Apply the general rule if the event does not fit within any of the four special consistency rules Change in Status: The Consistency Requirement •  The general consistency rule •  Does the change affect eligibility affect eligibility for coverage under another employer’s plan? •  Leaves of absence? •  Change in status affecGng eligibility under a non-­‐employer-­‐sponsored plan will generally not permit a mid-­‐year elecGon change under the general consistency rule •  But other permieed elecGon change events may apply Change in Status: The Consistency Requirement •  The general consistency rule •  Is the elecGon change on account of and does it correspond with the change in status event? •  General rule– if one type of coverage is gained or lost, then employee is limited to changing elecGon for that type (or similar type) of coverage •  E.g., if dental coverage is lost, dental and/
or medical FSA coverage may be added Change in Status: The Consistency Requirement •  The general consistency rule •  Coverage opGon changes are permieed when there is a permissible change in coverage Ger Example: Rachel’s employer offers both an HMO and PPO medical plan opGon under its SecGon 125 plan. Rachel enrolls in single coverage under the HMO opGon before the beginning of the year. During the year, Rachel has a baby. She wants to change her elecGon to enroll in two-­‐person coverage under the PPO opGon. RESULT: Rachel’s requested change is consistent with the change in status event (birth of a child) and therefore should be allowed. Change in Status: The Consistency Requirement •  The general consistency rule •  “Tag-­‐along” rule– other eligible individuals can be added when a spouse or dependent gains eligibility as a result of a change in status event Example: Elise is married to Fred. They have a child, Gary. Elise is currently enrolled in employee-­‐only medical coverage under her employer’s SecGon 125 plan. During the year, Elise has another child, Jane. Elise wants to change her elecGon to family coverage and enroll Jane, Fred and Gary. RESULT: Under the tag-­‐along rule, the elec1on change is consistent with the change in status event (birth of a child). Elise should be permiQed to enroll not only Jane, but Fred and Gary as well. Cost or Coverage Changes • 
• 
• 
• 
• 
• 
Insignificant cost changes Significant cost changes Significant curtailment of coverage AddiGon or significant improvement of a benefit opGon Change in coverage under other employer’s plan Loss of group health coverage under a plan sponsored by a governmental or educaGonal insGtuGon Cost or Coverage Changes: Insignificant Cost Changes •  Employee contribuGons may be automaGcally increased/decreased if there is an insignificant increase/decrease in the cost of a qualified benefit during the year •  Plan document must provide for automaGc contribuGon adjustments •  AutomaGc contribuGon adjustments are only permieed if the cost change is insignificant •  RegulaGons provide liele guidance as to when a change is significant/insignificant •  Facts and circumstances •  Example indicates that a 12.5% change in cost may be significant Cost or Coverage Changes: Significant Cost Changes •  Significant cost increase: employee may increase elecGon, elect coverage under another benefit opGon providing similar coverage or, if no similar coverage opGon is available, revoke elecGon •  Significant cost decrease: employee may decrease elecGon, enroll in coverage (if previously waived) or elect coverage under a similar coverage opGon Cost or Coverage Changes: Significant Curtailment of Coverage •  What is a “significant curtailment” of coverage? •  Generally examines plan as a whole, not individual parGcipants •  Includes an increase in deducGble, co-­‐payments, out-­‐of-­‐
pocket cost-­‐sharing •  Significant curtailments resulGng in a loss of coverage: •  EliminaGon of plan opGon, substanGal decrease in medical providers available, reducGon in benefits for a specific type of medical condiGon for which treatment is being received, other similar “fundamental loss of coverage” Cost or Coverage Changes: Significant Curtailment of Coverage •  Significant curtailment without a loss of coverage •  Employee may revoke elecGon for curtailed coverage and prospecGvely elect coverage under another benefit opGon providing similar coverage •  Significant curtailment with a loss of coverage •  Employee make a new prospecGve elecGon for other benefit opGon providing similar coverage or, if no similar coverage is available, revoke elecGon Cost or Coverage Changes: AddiGon or Significant Improvement of Benefit OpGon •  What is a “significant improvement” of coverage? •  Facts and circumstances •  Example indicates that a decrease in copays under a health plan opGon is a significant improvement •  If there is an addiGon or significant improvement of a benefit opGon, employee may elect the newly added (or improved) benefit opGon, even if had previously waived. Cost or Coverage Changes: Change in Coverage under Other Employer’s Plan •  Other employer’s plan increases coverage: •  Employee may decrease or revoke elecGon for employee, spouse or dependents if they have elected (or will elect) corresponding coverage under other employer’s plan •  Other employer’s plan decreases or ceases coverage: •  Employee may enroll or increase elecGon for employee, spouse or dependents if they have elected (or will elect) corresponding decrease in coverage under other employer’s plan Other Laws or Court Order Events • 
• 
• 
• 
• 
• 
• 
• 
HIPAA special enrollment events COBRA qualifying events Judgments, decrees, or orders (e.g., QMCSOs) EnGtlement to Medicare or Medicaid FMLA leaves Pre-­‐tax HSA contribuGons ReducGon in hours (ACA) Exchange enrollment (ACA) Other Laws or Court Order Events: HIPAA Special Enrollment Rights •  HIPAA requires health plans to provide special enrollment opportuniGes acer the iniGal enrollment period upon: •  Loss of eligibility for coverage under a group health plan or through health insurance •  New spouse or dependent is acquired by marriage, birth, adopGon, or placement for adopGon •  Loss of eligibility for Medicaid or coverage under a state children's health insurance program (CHIP) •  Eligibility for a premium assistance subsidy under the plan from Medicaid or CHIP •  The SecGon 125 plan may allow an employee to make an elecGon change under the cafeteria plan to correspond with these HIPAA special enrollment rights Other Laws or Court Order Events: COBRA Qualifying Events •  A SecGon 125 plan may permit an employee to increase pre-­‐
tax contribuGons for coverage if a qualifying event under COBRA occurs with respect to the employee or his or her spouse or dependent—such as loss of eligibility for regular coverage due to loss of dependent status under the health plan or a reducGon of hours Other Laws or Court Order Events: Judgment, Decree or Order •  If a judgment, decree, or order (including a qualified medical child support order) resulGng from a divorce, legal separaGon, annulment, or change in legal custody requires accident or health coverage for an employee's child, then the employee may change his or her elecGon to (a) add coverage if the order requires coverage for the child under the employee's plan; or (b) drop coverage if the order requires another individual to provide coverage for the child and the coverage is actually provided. Other Laws or Court Order Events: EnGtlement to Medicare or Medicaid •  If an employee (or the employee's spouse or dependent) becomes enGtled to Medicare or Medicaid coverage (i.e., becomes enrolled), then the employee may make a prospecGve elecGon change to cancel or reduce health coverage under the employer's plan and to make a corresponding change in salary reducGons. •  Loss of Medicare or Medicaid enGtlement also allows an employee to make a new elecGon to commence or increase health coverage under the employer's plan. Other Laws or Court Order Events: FMLA Leave •  An employee may revoke an exisGng elecGon of group health plan coverage and make such other elecGon for the remaining porGon of the period of coverage as provided under the FMLA and IRS rules. For employees conGnuing group health plan coverage during an unpaid leave, three payment opGons can apply, depending on how the plan is draced. Employees can (a) prepay their contribuGons on a pre-­‐tax basis (provided that the leave does not straddle two plan years); (b) make payments on a pay-­‐as-­‐you-­‐go basis; or (c) catch up on the contribuGons acer returning from leave. Other Laws or Court Order Events: Pre-­‐Tax HSA ContribuGons •  If pre-­‐tax HSA contribuGons are offered, then prospecGve HSA elecGon changes must be allowed at least monthly—a Gme period that correlates with the HSA monthly eligibility rules—and upon a loss of HSA eligibility. •  The employee may not change any of his or her other elecGons as a result of the HSA elecGon change unless otherwise permieed due to one of the other permieed elecGon change events previously described. Other Laws or Court Order Events: ReducGon in Hours •  If employee has a reducGon in hours so that the employee is expected to average less than 30 hours of service may drop coverage midyear under a group health plan (but not health FSA) and that provides minimum essenGal coverage under the health care reform rules— even if the reduc$on of hours does not result in loss of eligibility for the plan— so long as the employee (and any related individuals whose coverage is being dropped) intends to enroll in other minimum essenGal coverage. •  The other coverage must be effecGve no later than the first day of the second month following the month in which the original coverage is dropped. SecGon 125 plans may rely on an employee's reasonable representaGon about the intended enrollment. • 
Other Laws or Court Order Events: Exchange Enrollment An employee who is eligible to enroll in Exchange coverage (during an Exchange special or open enrollment period) may drop coverage midyear under a group health plan (but not health FSA) and that provides minimum essenGal coverage under the ACA, if the employee (and any related individuals whose coverage is being dropped) intends to enroll in Exchange coverage that is effecGve no later than the day acer the last day of the original coverage •  Plan may rely on an employee's reasonable representaGon about the intended enrollment QuesGons? Sara Tountas [email protected] 616.485.2731