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.
In prior months, articles have broken down the complexity of the six categories that 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
Any change in employment status that affects eligibility under either the underlying benefit or the cafeteria plan, will also qualify as a change in status event. This category includes any of the following events that change the employment status of the employee, the employee’s spouse, or the employee’s dependent: termination or commencement of employment, strike or lockout, commencement of or a return from an unpaid leave of absence, or a change in worksite.
In addition, if the eligibility conditions of the cafeteria plan or other benefit plan of the employer of the employee, spouse, or dependent depend on the employment status of that person (as most do); and if there is a change in that employment status so that he or she becomes (or ceases to be) eligible, then that constitutes a change in employment. The classic example is termination of employment. For example, if an employee terminates employment, he or she will usually become ineligible for benefits (other than when continuation coverage applies, like COBRA). This change in employment status would also allow the employee to enroll in a spouse’s plan, if one is available and allows this change in status.
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.
If a plan covers only salaried employees, and an employee moves from salaried to hourly then the move impacts the eligibility of coverage. An individual moving to a non-eligible position would constitute a change in employment status. Another common change that could impact eligibility is moving from part-time to full-time.
Effective Date
Election changes for change in employment status typically must be prospective, meaning effective in the future. Regulations refer to changes intended to be for the “remaining portion of the period” of coverage and to “prospective” election changes. Pre-tax salary reduction elections cannot be changed retroactively.
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 contributions, starting with the pay period in which the election change is made.
A plan sponsor may allow election changes for a limited period after the change in employment status as provided in the plan documents (typically 30 or 60 days).
Conclusion
An employee generally 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. While employment status changes are some of the easier changes to administer, plan sponsor should be aware of the potential effects so they can appropriately guide employees through their options.
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.