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.
Defining Terms
A change in residence is not as simple as a plan participant might hope. The change in residence event allows for a change in the place of residence of an employee, spouse or dependent where the change affects their eligibility for coverage. Typically, an employee moving three blocks away will not trigger a change in status.
Evidence of Events
Qualifying event rules require plan participants to notify the plan of a status change request within a certain period as prescribed by the plan. Typically, a change in residence requires participants to request a change within 30 days from the date of the relocation. Employees who miss the notification deadline must wait until the next open enrollment period to make election changes. Employers should not allow pre-tax election change exceptions for participants who miss the deadline to notify the plan.
Eligible Changes
When a change in status is triggered, a cafeteria plan should only permit employees to make election changes that are consistent with the event. An election change satisfies the consistency requirement for change in status if the election change is on account of and corresponds with a change in status that affects eligibility for coverage under an employer’s plan. This could happen, for example, if an employee moves outside the service area of an HMO plan.
A move that results in the gain of eligibility allows the employee to enroll or increase election for the newly eligible employee, spouse, or dependent (including other previously eligible dependents under the tag-along rule). The change in residence would not allow for an election change under a health FSA, even if underlying health coverage change occurs. Eligibility for the FSA has not changed, only the underlying health, dental, or vision coverage eligibility may be impacted.
A move resulting in the loss of eligibility allows the employee to revoke their election or make a new election change if the change affects the employee’s, spouse’s or dependent’s eligibility for coverage. Like a gain of eligibility, the loss of eligibility under the underlying health coverage will not allow for a change in a health FSA election.
Effective Date
Election changes for change in residence typically must be prospective, meaning in the future. Regulations refer to changes intended to be for the “remaining portion of the period” of coverage and to “prospective” election changes. Salary reduction elections may only be changed on a prospective basis, change in residence does not allow for retroactive coverage.
If a plan sponsor needs to offer retroactive major medical coverage, 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 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.
A plan sponsor may allow election changes for a limited period after the change in residence as provided in the plan documents (typically 30 or 60 days).
Conclusion
An employee has the obligation to notify the Plan Sponsor if a change in status occurs, employers are obligated to ensure tax implications are handled appropriately. Each change in status impacts the employee, employer, and the coverage differently. The plan sponsor is tasked with reviewing the facts of each situation individually to determine plan allowances, consistency rules, and IRS Section 125 allowances.
Post-tax retroactive premiums may be a new process for many employers. However, unless the federal government decides to start gifting new homeowners with retroactive health coverage, neither HIPAA nor Section 125 allow for retroactive premiums to be taken on a pre-tax basis. A plan sponsor should review their policy documents to understand plan allowances and align current practice with current regulations. While ensuring compliance with plan documents and current practice, plan sponsors should also consider any additional burden that may be created, such as payroll complications.
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.