Last Thursday, the IRS issued Notice 2014-55 (“Notice”), which expands the scope of permissible mid-year election changes under the cafeteria plan rules to allow an employee to revoke an election of employer-sponsored health coverage in the event of the employee’s reduction in hours of service (even if there is no loss of eligibility for coverage) or to avoid duplicative coverage (or a gap in coverage) under a non-calendar year group health plan due to the purchase of coverage through a Marketplace.
The guidance under the Notice is effective as of September 18, 2014 and may be relied on immediately even though the IRS has yet to amend the cafeteria plan regulations to reflect the new guidance.
Elections under a cafeteria plan have generally been irrevocable during a period of coverage except in certain limited situations. For example, a cafeteria plan may allow an employee to revoke an election for health plan coverage mid-plan year if a covered individual experiences a change in employment status affecting his or her eligibility for coverage under a group health plan. Under the consistency requirement, the employee’s requested revocation must be limited to only those individuals who either become or cease to be eligible for coverage under the group health plan as a result of the change in employment status. A cafeteria plan may also allow an employee to make a new election mid-plan year to correspond with a special enrollment right (e.g., loss of other coverage or acquisition of a new dependent) under Code section 9801(f); however, such special enrollment right does not include the ability to enroll in a qualified health plan (“QHP”) through a Marketplace. Yet, the open enrollment period rules for Marketplaces do not permit the purchase of coverage commencing upon the end of a group health plan’s non-calendar plan year.
The IRS recognized that an employee for whom it may be more advantageous to enroll in a QHP or other health plan providing minimum essential coverage (“MEC”) rather than to continue coverage under an employer-sponsored group health plan may be deterred from doing so due to the existing restrictions on mid-plan year election changes under cafeteria plan rules.
Reduction in Employee’s Hours of Service
In order to minimize the potential for being hit with a penalty under Code section 4980H, many employers are structuring their group health plans to offer coverage to employees who are determined to be full-time employees for the entire stability period that follows the look-back period. Consequently, an employee who actually changes from full-time to part-time employment status during the stability period may not have a change in employment status permitting a mid-year election change since there is no loss in eligibility for group health plan coverage. To remedy the situation, the IRS provides that a cafeteria plan may be amended to permit such a participant-employee to prospectively revoke an election for group health plan coverage (other than under a health flexible spending account) that provides minimum essential coverage (“MEC”) as long as:
- The employee has been in an employment status under which the employee was reasonably expected to average at least 30 hours of service per week and there is a change in that employee’s status so that the employee will reasonably be expected to average less than that after the change (even if that reduction does not result in the employee ceasing to be eligible under the group health plan); and
- The revocation of the election of coverage under the group health plan corresponds to the intended enrollment of the employee (and any related individuals who cease coverage due to the revocation) in another plan that provides MEC with the new coverage effective no later than the first day of the second month following the month that includes the date the original coverage is revoked.
A cafeteria plan is permitted to rely on an employee’s reasonable representation that the employee and related individuals have enrolled or intend to enroll in another plan that provides MEC effective as for the above referenced period.
Participation in Non-Calendar Year Plan
The IRS noted that the lack of a change in status event where an employee purchases coverage through a Marketplace could create a synchronization issue. In particular, if an employee enrolls in coverage through a non-calendar year group health plan and then decides to purchase coverage through the Marketplace, the potential exists that the coverage periods would not line up. This would result in either overlapping coverage or a gap in coverage. To address this issue, the Notice permits a cafeteria plan to allow a participant-employee to revoke an election for group health plan coverage so long as:
- The employee is eligible for a Special Enrollment Period to enroll in a QHP through a Marketplace pursuant to guidance issued by the U.S. Department of Health and Human Services (and any other applicable guidance), or the employee seeks to enroll in a QHP during the Marketplace’s annual open enrollment period; and
- The revocation of the election of coverage under the group health plan corresponds to the intended enrollment of the employee (and any related individuals who cease coverage due to the revocation) in a QHP for new coverage that is effective beginning no later than the day immediately following the last day of the original coverage that is revoked.
Again, the cafeteria plan may rely on an employee’s reasonable representations as to the employee and other related individual’s enrollment (or intention to enroll) in a QHP for the above referenced period.
To take advantage of the Notice’s election change provisions, an amendment to the cafeteria plan generally must be adopted on or before the last day of the plan year in which the elections are allowed and may be effective retroactively to the first day of such plan year as long as: (1) the cafeteria plan operates in accordance with the guidance, and (2) the employer informs participants of the amendment. For a plan year that begins in 2014 the amendment may be made at any time on or before the last day of the plan year that begins in 2015. However, no election to revoke coverage on a retroactive basis is permitted.