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 most 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 must have occurred and 2) The requested election change must be consistent with the event.
Events falling within six categories are considered change in status events. The categories include change in legal marital status, change in number of dependents, change in employment status, residence change, dependent satisfies or ceases to satisfy eligibility requirements, and adoption assistance provided through a cafeteria plan, as well as 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 plan sponsor’s obligations under current regulations.
Defining Terms
Events that change an employee’s marital status are considered a change in status. According to the IRS, this change includes marriage, divorce, death of spouse, legal separation, and annulment. In 2013, the IRS began acknowledging both same-sex and opposite sex as legal marriages; meaning same-sex marriage will qualify as an election change event and trigger HIPAA special enrollment rights for major medical coverage. See the Change in Status Rules: Introduction article for a better understanding of special enrollment rights versus change in status events. Under IRS regulations, the term spouse includes all legally married same sex or opposite sex spouses, it does not include domestic partners.
Legal separation, as it pertains to a change in status, can be difficult to define. The regulations do not define legal separation for purposes of Section 125 or change in status events. Typically, what constitutes a legal separation is controlled by applicable state family law principles. Although not all states recognize legal documentation of separation, most will. Due to consistency rules, no change would be allowed for legal separation if eligibility under the applicable plan is not lost because of that legal separation. Most plans do not change eligibility until the divorce has been finalized.
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, 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 the coverage and enroll on the spouse’s plan. Employers should not allow pre-tax election changes for employees who miss the notification deadlines. Employees who miss the notification deadline must wait until the next open enrollment period to make election changes.
While regulations do not require proof of a status change be obtained, HUB recommends requiring documentation if it is done in a consistent manner. Examples of potentially appropriate proof would be a marriage certificate, divorce decree, court approved legal separation document, death certificate, or page one of a federal tax return. This is not an exhaustive list; other proof may also be appropriate.
The plan sponsor’s cafeteria plan document, health plan document, and health insurance policy must allow for the election change the employee wants to use.
Eligible Changes
Eligible changes will be dependent upon the event that occurred, and which change in status was triggered for the employee and their spouse. Gaining a spouse allows the employee to enroll or increase their election for their newly eligible spouse and dependent children. The employee may also change their coverage options, while changing elections for dental, vision, FSA, and potentially group term life, AD&D and disability coverages.
The loss of a spouse through a divorce, legal separation, annulment or death only allows the employee to revoke the election for the spouse. The loss does not allow the employee to also terminate their own coverage.
Effective Date
Generally, election changes for change in marital status must be prospective, or in the future. The regulations refer to changes intended to be for the “remaining portion of the period” of coverage and to “prospective” election changes. Unlike the change in number of dependents, change in status rules do not allow retroactive coverage under a change in marital status. Salary reduction elections may only be changed on a prospective basis.
If a plan sponsor wants to offer retroactive major medical coverage to the date of marriage, they must be willing to collect after-tax employee contributions. Plan sponsors should require employee contributions for coverage during the retroactive period to be made with after-tax dollars, outside the cafeteria plan. For coverage provided after the election change, the employer could permit the employee to pay with pre-tax salary reduction contributions, starting with the pay period in which the election change is made.
Plan Sponsor’s may allow election changes for a limited period after the event as provided in the plan documents (typically 30 or 60 days). However, HIPAA special Enrollment rights require the election be available for a minimum period.
Conclusion
Employees must be sure to notify their employer of the change in status, while employers must be sure tax implications are handled properly. Unfortunately, there isn’t a clear blanket answer that covers all change in status scenarios. A plan sponsor is tasked with reviewing the facts of each situation and determining plan allowances, consistency rules, and IRS Section 125 allowances.
Post-tax retroactive premiums may be a new process for many employers. However, until the federal government produces a “congratulations on your nuptials” federal act, neither HIPAA nor Section 125 allow for retroactive premiums to be taken on a pre-tax basis. Plan sponsors are often faced with carriers allowing for retroactive coverage without informing the plan sponsor of possible tax obligations. Plan Sponsor’s should review policy documents to understand what their current plan allows and how that plays into their current practice and regulations.
Plan sponsors should confirm with their tax advisor or payroll advisor regarding all payroll tax considerations. In some instances, a payroll vendor may not easily be able to support post-tax retroactive premiums. Plan sponsors should not only ensure plan documents agree with their practice, but also think about any additional administrative burden that may be created.
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.