By: HUB’s EB Compliance Team
While it is a big selling point, the tax savings that cafeteria plans offer are not without their limitations and requirements. Contrary to widespread belief, Congress and the IRS do not give away tax revenues without strict restrictions. The IRS requires that all cafeteria plans meet at least three specific requirements: (1) having a written plan document, (2) making the pre-tax benefit available without disproportionately benefiting highly compensated employees, and (3) ensuring participant elections are generally irrevocable for 12-months. If these and other requirements are ignored, the pre-tax benefit of a cafeteria plan may be lost, resulting in unexpected tax obligations for both employers and employees.
Background
Cafeteria plans must follow the general principle that participant elections cannot be changed during the period of coverage (generally, the plan year) but there are some limited exceptions. Under IRS section 125, employers can choose whether to offer certain mid-year election changes. These mid-year election change opportunities are permissible as long as they are included in the cafeteria plan document and also permitted by the underlying benefit plan. The categories of changes include a change in job status (of the employee or the employee’s spouse or dependents), certain cost changes to the underlying benefit plan, and other limited events. This article is the first in a series that will explore the various changes in status available under cafeteria plans.
Defining Terms
The terms HIPAA special enrollment rights, change in status, and qualifying life events are often used interchangeably. While related concepts, they are not the same. It is important for Plan Sponsors to understand the distinctions between each term to know the impacts each may have on an individual’s eligibility.
A HIPAA special enrollment right can be triggered by two main events for individuals who previously declined health coverage: loss of other health coverage and certain life events. This protection provides additional opportunities for employees to enroll if they lose other health coverage, get married or add a new dependent. However, HIPAA special enrollment rights alone do not allow for pre-tax election changes. These changes must also be listed as permissible Section 125 election change events in the cafeteria document. Given that special enrollment rights are mandatory for health plans, employers typically include them in their cafeteria plans if employees are paying for any part of the coverage.
A change in status refers to any significant life event that affects an individual’s eligibility for health insurance coverage. Common examples include marriage, divorce, birth or adoption of a child, and changes in employment status.
Qualifying life events (QLEs) are specific events that allow individuals to make changes to their health insurance coverage outside of the open enrollment period. Common examples include marriage, birth or adoption of a child, loss of other health coverage, and change in residence. There is often a lot of overlap between change in status events and QLEs.
Ultimately, HIPAA special enrollment rights are a specific type of enrollment opportunity triggered by certain life events or loss of other coverage. Change in status and qualifying life events are broader terms that describe the events that can trigger these special enrollment rights.
Employers are not required to allow employees to change their elections mid-year, but they may choose to design their plan to allow IRS approved events. These approved events must meet IRS regulations that include consistency rules, timing, and specific documentation requirements. They must also be available under the underlying coverage.
Conclusion
While change in status rules are common, they are not mandatory, but they also come with various conditions and rules. Over this series, we will take a deep dive into each event to provide much needed clarity for plan sponsors to comply with specific IRS regulations.
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