By: HUB’s EB Compliance Team
Regulatory Background
Under IRS Section 125 current regulations, a cafeteria plan may be drafted to permit a participant to change elections midyear on account of a change in status. Change in status events are the basis for the majority of election change requests and have some complicated rules to follow. Two requirements must be met for a change in status 1) A specified change in status event must have occurred and 2) The requested election change must be consistent with the event.
Under the regulations, events falling within the following six categories are change in status events.
- Change in legal marital status
- Change in number of dependents
- Change in employment status
- Dependent satisfies or ceases to satisfy dependent eligibility requirements
- Residence change
- Adoption assistance provided through a cafeteria plan (including the commencement or termination of an adoption proceeding).
Navigating IRS rules surrounding these change in status events can be complex and confusing for employers. Over the coming months, future articles will break down the six distinct categories to help clarify the rules and an employer’s obligations under current regulations.
Defining Terms
The IRS defines a “change in the number of dependents” to include birth, adoption, placement for adoption, and death. Typically, birth, adoption, or placement for adoption will also trigger HIPAA special enrollment rights for major medical coverage. See Change in Status Rules: Introduction article for a better understanding of special enrollment rights versus change in status definitions.
The regulations define a dependent as a qualifying child or a qualifying relative bearing a required age and relationship to the taxpayer (with exceptions).
- A relationship exists if the individual is
- a child of the taxpayer or a descendent of such a child, or
- a brother, sister, stepbrother, or stepsister of the taxpayer or a descendant of any such relative
- An individual meets the age requirements if such individual
- is younger than the taxpayer claiming such individual as a qualifying child,
- has not attained the age of 19 as of the close of the taxable year,
- is a student who has not attained the age of 24 as of the close of the taxable year or
- the individual is permanently and totally disabled
Health care reform requires groups that offer dependent medical coverage to continue to make that coverage available for children until age twenty-six, regardless of a child’s residency, financial dependence, student status, employment, or other factors.
Evidence of Events
Qualifying event rules require participants to notify the plan of a status change request within a certain period prescribed by the plan. For example, after the birth of a child, the employee typically has 30 days from the birth to notify the plan. The employee can add the new dependent to the employee’s coverage. The employee may also drop their coverage and enroll on the spouse’s plan if the employee and dependent become eligible for a spouse’s plan. Employees who notify the plan after the deadline cannot change their elections until the next open enrollment or another qualifying event occurs.
While the regulations do not require employers to obtain proof of a status change, HUB recommends requiring documentation if it is done in a consistent manner. Examples of potentially appropriate proof would be a birth certificate, adoption court order, or a death certificate. This is not an exhaustive list; other proof may also be appropriate.
Eligible Changes
Generally, gaining a dependent allows an employee to enroll themselves, the newly eligible dependent, and any other dependents who were not previously covered prior to the change in status. This change allows for major medical, dental and vision elections and coverage option changes (e.g., HMO to PPO). The employee may also revoke or decrease their current elections if the employee or dependent becomes eligible under a spouse’s group health plan. Employees may also make election changes to their Health and Dependent Care FSA accounts to accommodate the newly eligible dependents.
The loss of a dependent provides stricter regulations by limiting the employee’s election change options. The employee may only drop coverage for any dependent who loses eligibility, they may not terminate coverage for any other members previously elected.
Effective Date
Generally, election changes must be prospective; however, there is one exception to this rule. The HIPAA special enrollment rules require group health plans to provide coverage retroactively when there is a special enrollment due to birth, adoption, or placement for adoption. This exception allows change in dependent election changes to be placed retroactive to the date of the event. However, any premiums can only be collected from pay that has not yet been earned, so while the coverage can be retroactive, the payroll deductions must be prospective.
Plan Sponsor’s may allow election changes for a limited period after the event, as provided in the client’s plan documents (typically 30 or 60 days). However, HIPAA special enrollment rights require the election be available for a minimum period.
Conclusion
While the birth of a child or the completing of an adoption are an exciting time for employees, employees must be sure to notify their employer of the change in status. Employees may have a limited time to utilize their change in status based on the employer’s plan design.
While an employer is under no obligation to track down new parents, they should be diligent in evaluating election change requests to ensure the change is permitted for the specified event. It is important to review plan documents to ensure the election change is allowed and all change in status event requirements are followed.
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.