On Thursday, September 18th, the IRS issued several Notices on issues of interest to employers sponsoring employee benefit plans. Here's a brief update on two Notices.   

IRS Notice 2014-56: PCORI (Research) Fee Adjusted Applicable Dollar Amount

Federal health care reform law imposes new fees on health insurance carriers and self-funded plans to fund a new entity known as the Patient-Centered Outcomes Research Institute.  The Institute has been established to perform "comparative effectiveness research" (CER); which generally refers to comparative assessment reporting to the government about the relative success rates of various medical procedures. 

The fee is imposed upon health insurance carriers and self-funded plans for each plan year ending after September 30, 2012 and before October 1, 2019. For some, the fee was first payable in July 2013 (others had their initial payment in July 2014) at the rate of $1 per average coverage life. The fee increased to $2 per average coverage life for the second year.  Although the fee is expected to sunset by 2019, the amount of the fee is also expected to be increased based on increases in per capita national health expenditures. 

The increase applies for policy and plan years that end on or after October 1, 2014. The adjusted fee due will be $2.08 per average covered life for policy and plan years ending on or after October 1, 2014 and before October 1, 2015.  Future adjusted applicable dollar amounts will be published in Internal Revenue Bulletins.

The increase of the PCORI fee is effective as of October 1, 2014.  Payments for the fee remain due by July 31 of the calendar year following the end of the plan year and must be reported on Form 720.  In addition, this increase does not affect the responsibility of health insurance carriers to pay the fee for fully-insured groups.

IRS Notice 2014-55: Additional Mid-Year Election Changes for Health Coverage Under Cafeteria Plans

Employers have an option to give workers expanded flexibility to change elections based on enrollment in marketplace coverage and an expanded opportunity to allow change of election based on a certain type of hours reduction during a stability period.  Allowing employees to make these election changes is not advisable for a number of reasons, so employers will want to carefully consider whether they actually should avail themselves of this new option just because the law allows it.  A  Section 125 cafeteria plan allows pre-tax payment for certain benefits like a health plan option, but in exchange, an employee generally agrees to be held to a 12-month election for that coverage.  Why would an employer not allow these employee-friendly election changes?  First, adverse selection can result if employees can drop coverage mid-year.  The young and healthy tend to be the ones who decide they do not want the coverage since they have not used it, or because they believe the exchange policies are a better fit.  Second, carriers and reinsurers do not want the covered population to vary greatly, and may have clauses about such variation which allow for re-rating if fluctuation are too great.  Finally, allowing these election changes increases plan administration.  Elections are irrevocable except for certain circumstances in which the IRS permits election changes under the plan, often called a change in status and usually eligibility for the benefit must be affected (either lost or gained).

Under health care reform, when an employee gains full-time status over the course of a measurement period and then elects coverage, the employee will be locked into that election for the next 12 months.  That is true even if the employee works fewer hours because he will remain eligible despite the reduced hours.  It is also true even if the employee wants to join the insurance exchange during the fall enrollment window but his employer's medical plan uses a different plan year like June 1.

Even though allowing these optional mid-year changes is not advisable, here is a summary for any employers who still may be interested into doing so.  IRS Notice 2014-55 provides guidance on when an employee can make a mid-year cafeteria plan election change due to a reduction in hours of service or enrollment in a qualified insurance exchange policy.

Conditions for election revocation due to reduction in hours of service:

  • The employee's employment status was reasonably expected to average at least 30 hours of service per week and there is a change such that the employee will be reasonably expected to average less than 30 hours per week-even if the reduction does not affect the employee's group health plan eligibility; and
  • The revocation of the election of group health plan coverage corresponds to the employee's  (and any other related individuals)having enrolled or intended enrollment in another plan that provides minimum essential coverage effective no later than the first day of the second month following the month in which group health plan coverage is revoked.
  • Conditions for election revocation due to enrollment in an exchange policy, also called a Qualified Health Plan:
  • The employee is eligible for a Special Enrollment Period to enroll in a Qualified Health Plan through a state or federal  insurance exchange or seeks to enroll during the Marketplace's annual open enrollment period; and
  • The revocation of the election of the group health plan coverage corresponds to the employee's (and any other related individuals)having enrolled or  intended enrollment in a Qualified Health Plan through an exchange for new coverage effective beginning no later than the day immediately following the last day of the original coverage that is revoked.

In both situations an employer's cafeteria plan can rely on the employee's representation of intent to meet the condition of enrolling in another plan that provides minimum essential coverage or a Qualified Health Plan.

This Notice is effective as of September 18, 2014 and can be relied upon pending further guidance.

Employers will take heed to note that this is limited permission to make a mid-year election change, as it is only applicable to the group health plan coverage.  It does not affect any other elections under the cafeteria plan. Additionally, an election change may not be made on a retroactive basis. Furthermore, employers will need to amend their cafeteria plans to allow the election changes under this notice. 

Keep visiting HUB's Health Care Reform blog for implementation news and updates and get the resources and guidance needed to ensure you stay up to date.