By: HUB’s EB Compliance Team
Most employers who offer benefits to their employees do so through a cafeteria plan, which allows employees to pay their portions of the premiums with pre-tax dollars. This is a win for both the employer, who reduces their payroll tax burden, and the employee, who reduces their taxable income. However, there is a tradeoff: elections under a cafeteria plan cannot be changed during the plan year, unless the participant experiences a qualifying life event (sometimes just called a qualifying event).
Qualifying events come in two different varieties. Plans must include some of these events, while others are optional. Both can result in issues when the plan requires the participant to provide evidence of the event before allowing the election change.
HIPAA Special Enrollment Rights
The first category of qualifying events is HIPAA special enrollment rights. Group health plans must include these in their eligibility terms. These rights include such events as losing other coverage, becoming eligible for state premium assistance, and the acquisition of a new dependent through marriage, birth, adoption or placement for adoption.
Permitted Election Changes
The next category is the Permitted Election Changes under the IRS cafeteria plan rules. These changes are not mandatory and employers may choose to include all, some or none of these events in their cafeteria plans. Most employers include them all. Examples of these events include changes in status (such as marriage or divorce), significant cost changes, Medicare or Medicaid entitlement, and FMLA. There is some overlap between permitted election changes and HIPAA special enrollment rights.
The qualifying event rules require participants to notify the plan of the qualifying event within a certain time period prescribed by the plan (Employers must allow at least 30 or 60 days for HIPAA special enrollment rights, depending on which special enrollment event applies). For example, if an employee gets married, the employee typically has 30 days from the date of the marriage to notify the plan. The employee can add the new spouse to the employee’s coverage, or drop coverage and enroll on the spouse’s plan. Employees who notify the plan after the deadline cannot change their elections until open enrollment, unless they have another qualifying event.
Rather than just taking the employee’s word for it, employer plans are increasingly requiring evidence of the qualifying event. With ever increasing health costs employers want to make sure everyone in the plan is actually eligible for the plan. For employees who marry, the evidence may be in the form of a marriage license or certificate. For employees who give birth to a child, the birth certificate could function as the evidence. Other evidence may be acceptable as well.
While plans describe how long employees have to notify the plan of the qualifying event, they are often silent on evidence. This can leave the employer and employee in a gray area. For example, an employee may verbally notify the plan of a marriage within 30 days, but then take three months to provide the evidence. In this situation some plans may still allow the enrollment on the basis that the verbal notice was in fact “notice”. Other plans may deny the enrollment because the evidence was not provided timely.
If the employer allows enrollment in this situation, when is the enrollment effective? IRS rules require that deduction changes to be effective only after the qualifying event notice is provided. There is one limited exception for birth or placement for adoption under the HIPAA special enrollment rules. However, even then, the premiums for the retroactive coverage can only be taken from amounts paid to the employee after the change in election is effective. For this reason, most employers choose to only provide coverage going forward after the date of the notice or the date evidence is provided (except in the case of birth or adoption).
But what happens if, as in the example above, there is a long delay between the notice and the evidence? If the employer delays enrollment until the evidence is provided, the enrollment may look unconnected to the qualifying event. This could be seen as violating cafeteria plan rules that require the change in election to be “on account of” and corresponding to the qualifying event. For fully-insured plans, it may also not be permitted by the carrier.
On the other hand, if the employer allows enrollment before the evidence is provided, what happens if the evidence is not adequate (or never provided)? Can the employer go back and “undo” the election change? This presents legal, practical, and employee relations concerns that most employers would prefer to avoid.
Given these complexities, there are a number of best practices for plans looking to limit these challenges while requiring evidence:
- Determine if an evidence requirement is right for your plan. This involves both looking at your employee population and your annual enrollment practices.
- Consider whether all qualifying events should require evidence, or only certain events, such as adding or removing a spouse or dependent.
- Include the evidence requirement in the applicable plan language. This means your plan/wrap document, summary plan description and cafeteria plan document where applicable.
- This language should both describe in general terms what documentation serves as effective evidence and state the deadline for submitting it. In most cases, it will not make sense to try to list all potential forms of evidence; it may be better to give examples. (For fully-insured plans, make sure any deadlines line up with what your insurer allows.)
- Apply the evidence requirement consistently with all impacted employees.
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.