IRS Allows Cafeteria Plan Election Changes to Coordinate With ACA Exchanges

by Davis Wright Tremaine LLP

New IRS guidance adds two more events that allow participants to change their cafeteria plan elections outside of the annual open enrollment period. These events are designed to coordinate with the employer coverage rules and the individual coverage available in the health insurance Exchange (Marketplace). Cafeteria plans can implement these new rules immediately, and amend their plans by the end of 2015. Notice 2014-55.

We came up with this limerick to remember the intent behind these new rules:

    If his Flex Plan election changes
    Coordinate with the Exchanges
    A participant may
    Without further delay
    Use whichever plan he arranges.

The first new exception is for an employee whose hours of work are reduced to below 30 hours per week, even if they do not lose eligibility for the plan. (This makes it different from the “change of status” or COBRA event exception.) The IRS explained that such an employee might not lose employer coverage because their coverage must be maintained under the employer mandate “stability period” rules, but might still want to move to other coverage for other reasons, such as it no longer being affordable on a reduced income.  However, the exception is not limited to that situation. The employee can change his or her election to revoke employer coverage only if the employee (and any covered dependents who lose coverage) intends to enroll in other “minimum essential coverage” by the first day of the second month following revocation. For example, an employee who revoked coverage in June would have to arrange other coverage starting no later than Aug. 1. This does not have to be Exchange coverage. In fact, because a reduction in hours without loss of coverage does not trigger a special enrollment right in the Exchange, it is more likely that the replacement coverage will be some other coverage, such as under a spouse’s plan or even Medicaid coverage, if the employee qualifies.

The second exception is specifically for employees who have either a special enrollment right or an open enrollment period to enroll in individual coverage through the Exchange. It allows the participant to revoke employer coverage if the employee (and dependents who lose coverage) intends to obtain a Qualified Health Plan through the Exchange, effective immediately after the employer coverage terminates. This exception is particularly helpful if the employer plan is not on a calendar year basis, in other words, when the Exchange open enrollment period is mid-year for the employer plan. In that situation the employee can shop for Exchange coverage and move off the employer plan (but might not qualify for subsidies if the employer coverage was affordable).

In both cases, the plan may rely on the reasonable representations of the employee as to the intent to timely enroll in the appropriate plan. But an employee is not allowed to revoke coverage retroactively.  Nor is any change allowed to a health FSA (Flexible Spending Account).

Like all election changes, these new exceptions are optional for a plan to adopt, but most plans will offer all the election change events allowed by the IRS. The plan must be amended by the end of the year retroactive to when the new rules were implemented. For plan years beginning in 2014, the amendment can be made by the end of the plan year beginning in 2015.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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