February 16, 2018
Last December’s enactment of federal tax reform generated lots of media buzz about employers granting bonuses or giving wage increases. Other compensation adjustments have been in vogue as well – including a renewed look at the employer subsidy for benefit costs (particularly health coverage costs). But if an employer increases its subsidy (and therefore reduces the employee’s required contribution), does that give the employees a chance to change their elections?
Cafeteria Plan Change in Status
The answer for a given employer requires a close look at the specific facts and circumstances. In particular, an employee’s ability to adjust his or her election depends: (1) on whether the applicable plan documents include language permitting cost-related election changes; and (2) whether the group health plan’s cost change would be considered “significant” or “insignificant.”
Significant v. Insignificant Group Health Plan Cost Change
The IRS rule is that if the cost changes are considered “insignificant,” then the cafeteria plan can automatically adjust the amount of pre-tax employee contributions. The employee is not allowed any election adjustments, but the employee’s election will be automatically adjusted to reflect the change in amount.
By contrast, if the group health plan cost change is deemed “significant,” then employees who are affected by the change may have the option to change their elections. If the employee contribution gets significantly less expensive because the employer is using some of its tax savings to increase its benefits subsidy, then employees can buy up to more expensive coverage, or enroll in coverage if not previously enrolled. Note, however, that a participant already enrolled in the most expensive coverage would not be able to change his or her election. This makes sense because if they were willing to pay the cost for the most expensive option before it decreased, they should not have an issue with paying the lower cost.
While cost increases are not necessarily the likely response to tax reform, if the employee contribution gets significantly more expensive, then employees can change elections and switch to lower cost coverage. In other words, the person could move from a gold-type health benefit to a less expensive silver-type health benefit or from silver to bronze. Specifically, the person is only allowed to move down the “cost” ladder to any similar but more affordable coverage; if the person was already using the lowest price coverage tier (e.g. already sitting at the lowest rung of the ladder), under IRS rules he’d be out of luck. However, as one exception to that rule, if an employer only offers one coverage option, and the cost increases, then employees may drop coverage altogether.
This limited ability to switch coverage is different from the employer being obliged to offer a mid-year open enrollment opportunity to everyone. For example, if the employee contribution to health insurance went down, that would not give employees the right to enroll in a health flexible spending account or to change elections for other benefits (like vision and dental insurance). The employees’ rights would be limited to change in health insurance.
But what does it mean for a cost change to be “significant” or “insignificant”? Officially, the IRS has never defined these terms. Therefore, employers have to evaluate all the relevant facts and circumstances to determine if a cost change is significant or insignificant. For example, this could include the following factors:
- The change in cost relative to the pay of its typical worker. A change of a few dollars in cost could be significant for a low-wage workforce, but may not be significant for a higher-paid workforce.
- The change in cost relative to the cost of coverage overall. A change of the same dollar amount might double the cost of a dental plan contribution, but not be significant for the health insurance plan.
Some employers use a 10% change as a “rule of thumb” for determining if a change is significant. This is based, in part, on public remarks of an IRS employee. However, those types of remarks are not an official IRS position and the IRS is not required to follow them; they only reflect the opinion of the speaker at the time they are made. In fact, the IRS is clear that employers cannot rely on these types of remarks as guidance. In other words, using a 10% rule of thumb is not a substitute for going through the facts and circumstances analysis.
Other Factors to Consider
In setting a new contribution, there are also other potential issues to consider:
1. For any change in cost:
a. Check the Plan Documents. As noted above, this change in status right must be reflected in the cafeteria plan document. It must also be permitted under the underlying benefit plan document as well (such as the health insurance contract).
b. Changing Plans. If an employee switches plans, the employee may have to satisfy a new deductible and out-of-pocket maximum for the year, which could be a hardship to the employee.
c. Stop-Loss Considerations. Self-funded employers should confirm the changes with their stop-loss carrier, if applicable.
d. Communication to Employees. Any change in the employee’s contribution should be communicated to employees and the communication should describe the consequences of the change to employees. Before communicating a change, the employer needs to determine if the change is significant or insignificant.
2. If the employee’s cost is decreasing: Re-underwriting. Where the employee’s cost goes down and new participants can enroll, the insurer may need to redo its underwriting. This could create additional cost increases or decreases. Therefore, the employer should consult their HUB broker and/or insurance carrier before making a change.
3. If the employee’s cost in increasing:
a. Minimum Contribution Requirements. This applies if the employee’s cost of coverage increases. Some state laws and some insurers may require that a certain percentage of the premium be paid by the employer. Therefore, the employer should consult their HUB broker and/or insurance carrier before making a change.
b. ACA Considerations. A change increasing the cost of coverage could also make coverage unaffordable under the Affordable Care Act and it may also jeopardize grandfathered status for a grandfathered health plan. Employers considering an increase in employee cost should evaluate these implications before moving forward.
c. HIPAA Special Enrollment Right. If an employer completely ceases its contribution to the cost of coverage (in other words, moves to an employee-pay-all structure), that will give an employee a special enrollment right in another plan, such as a spouse’s plan. This could result in them dropping coverage in the employer’s plan and enrolling in the spouse’s plan.
If you have any questions about your group health plan, please contact your HUB Advisor. View more compliance articles in our Compliance Directory.
NOTICE OF DISCLAIMER
The information herein is intended to be educational only and is based on information that is generally available. HUB International makes no representation or warranty as to its accuracy and is not obligated to update the information should it change in the future. The information is not intended to be legal or tax advice. Consult your attorney and/or professional advisor as to your organization’s specific circumstances and legal, tax or other requirements.