Keeping your Off-Cycle Enrollment Ducks in a Row

By: HUB’s EB Compliance Team

It’s summertime, and as Ella Fitzgerald and later Sublime said, the living is easy. Soon enough children will be back in school (if they aren’t already) and employers who sponsor calendar year plans will be preparing for annual enrollment. Although annual enrollment gets the most attention, employers can choose to do off-cycle enrollment to spread out the decisions employees have to make (and potentially the work for HR staff). However, this comes with some compliance issues to consider.

Background

For purposes of this piece, off-cycle enrollment refers to a plan sponsor offering an enrollment opportunity, frequently in newly offered benefits, during their plan year and outside of annual open enrollment. As an example, assume the law firm of Barksdale and Bell offers their employees fully-insured medical, dental and vision coverage on a calendar year basis. In August, they begin offering their employees accident, critical illness, and cancer coverage (all subject to ERISA) and as a result, they have an off-cycle enrollment for these coverages.

Considerations

Assuming Barksdale and Bell has more than 100 participants enrolled in each of these coverages on the first day of the plan year, they will have an annual 5500 filing requirement. Schedule As will need to be included in these filings for their new accident, critical illness, and cancer coverages, which means they will have some decisions to make.

Option 1 – Separate plan years

If they choose, Barksdale and Bell can effectively maintain two plan years: a calendar year plan for their medical, dental and vision coverages, and an off-calendar year plan beginning in August for their accident, critical illness and cancer coverages. However, this may not be the best choice. It will require them to maintain two wrap documents, complete two 5500 filings (since they are over 100 participants in both plans), and continue to hold two annual enrollment periods.

Apart from the example, if the plans involved are paid for with pre-tax dollars, that presents additional complications. Under IRS rules, elections once made generally must be in effect for the entire cafeteria plan year. However, the cafeteria plan year is likely to align with the health plan year (since that is the largest plan). This means an off-cycle enrollment would likely have to be collecting elections for the next cafeteria plan year, which would be very far in advance. On the other hand, if the benefits are not eligible for pre-tax premium treatment (like ID theft) or simply aren’t collected on a pre-tax basis, then this restriction would not apply. However, carriers may impose restricitons on elections in addition to what the law requries.

Option 2 – Align plan years with a short policy year

Now assume that Barksdale and Bell doesn’t want to maintain two plans and hold two annual enrollments. One way to get to this result is to make the initial policy year for accident, critical illness, and cancer coverage a “short” policy year that only runs from August through December. When the plan year renews in January, the accident, critical illness, and cancer coverages will renew then also.

Under this option, the 5500 filing for the first plan year the new benefits are offered will include the Schedule As for medical, dental and vision coverage as usual, as well as Schedule As for the initial short policy year for accident, critical illness, and cancer coverage. The 5500 filing for the next plan year will follow this same path, except the Schedule As for the accident, critical illness and cancer coverage will be for the entire policy year. This would also avoid the cafeteria plan problems (if they apply) since the plan years align.

Option 3 – Align plan years with a long policy year

Another option for aligning plan years is to have an initial policy term of longer than 17 months, or effectively a “long” year. To accomplish this, Barksdale and Bell would negotiate an initial policy term for their accident, critical illness and cancer coverage running from August of one year through December of the next year for a total of 17 months. The end result here is the same as with Option 2, when the plan renews after the first long policy year, the remaining policy years for accident, critical illness and cancer coverage will line up with the calendar plan year.

The 5500 filings under this option are very similar to the filings detailed above. The first filing will include Schedule As for the portion of the policy year (August – December) for accident, critical illness and cancer coverage that fell during the plan year. For the next year the Schedule As will include information for the portion of the policy year that fell during the that plan year. Like Option 2, this would avoid the cafeteria plan problems (if they apply) since the plan years align.

Different Plan Options

In the example discussed here, the off-cycle enrollment was only for new benefit offerings. Employers can however add additional plan options for existing lines of coverages off-cycle if they choose. For example, an employer who offers only a PPO health plan can add an HDHP; or an employer who offers only one dental plan can add a buy-up option. Adding plan options generally doesn’t raise the 5500 issues discussed above, however these can arise if for example, the new plan option uses a different insurance carrier. Adding new plan options does trigger employees’ ability to make additional elections under the cafeteria plan, if the options are paid for on a pre-tax basis.

Shifting Annual Elections

On the other hand, employers could also potentially shift their annual elections for certain benefits to other times of the year. As noted in Option 1 above, this presents a challenge for cafeteria-plan eligible benefits (unless the employer wants to maintain a separate cafeteria plan as well). However, adding an off-cycle enrollment for benefits that are not paid for a on pre-tax basis, or are fully employer-paid, may be an option. In those cases, it may also be possible to keep the same plan year and just do open enrollment for those benefits at a different time, without creating the need for another wrap document or Form 5500 (if the benefits are even subject to Form 5500 reporting). Employers should work with their carriers and HUB Advisor to determine if this works for them.

Takeaways

The singular takeaway is that while there may be reasons for doing a off-cycle enrollment, a little bit of planning on the front-end can go a long way towards making the 5500 filing process easier on the back end and avoid potential cafeteria plan issues.

If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory.

NOTICE OF DISCLAIMER

Neither Hub International Limited nor any of its affiliated companies is a law or accounting firm, and therefore they cannot provide legal or tax advice. The information herein is provided for general information only, and is not intended to constitute legal or tax advice as to an organization’s or individual's specific circumstances. It is based on Hub International's understanding of the law as it exists on the date of this publication. Subsequent developments may result in this information becoming outdated or incorrect and Hub International does not have an obligation to update this information. You should consult an attorney, accountant, or other legal or tax professional regarding the application of the general information provided here to your organization’s specific situation in light of your or your organization’s particular needs.