January 7, 2020
Happy New Year! Benefit plans have started their new plan years and questions are already coming in about how and when participants may change their plan elections. So, it’s a perfect opportunity to review the change in election rules for the most popular benefits plans such as, flexible spending accounts (FSAs) (cafeteria) plans, Health Reimbursement Arrangements (HRAs), Health Savings Accounts (HSAs), and parking and transit plans.
Cafeteria Plans
The IRS 1.125-4 Regulations outline a two-pronged approach to determining when a change may be made to an existing cafeteria plan election: (1) a change in status or a change in cost or coverage occurs, and (2) the election change satisfies the consistency rules. We’ll first look at the conditions necessary for a change and then discuss the consistency rule.
Although changes to current elections are not required in the plan document, most flexible benefit plan documents allow for election changes throughout the plan year. Please check your plan documents for specific rules surrounding allowable election changes.
Conditions for Change
Seven circumstances allow for changes to accident or health plans (including healthcare FSAs within a cafeteria plan), disability, group-term life insurance plans, dependent care assistance, and adoption plans:
These cost or coverage events would include situations in which an employee switches between full-time and part-time employment, an employer changes the percentage of premium that an employee must pay, or a new benefit option is added. The cost charged to an employee is the key factor in determining whether a cost change has occurred.
Consistency Rule for Accident or Health Coverage
The second part of the equation deals with whether the election change satisfies the consistency rule. The consistency rule applies to each employee, spouse, or dependent separately and basically requires that the election change be on account of and correspond with a change in status that affects eligibility for coverage under an employer’s plan. This includes an increase or decrease in the number of an employee’s family members or dependents who may benefit from coverage under the plan.
One exception to the consistency rule allows a plan to permit the employee to increase payments under the employer’s cafeteria plan if the employee, spouse, or dependent becomes eligible for COBRA under the group health plan of the employee’s employer.
Keep in mind that under these rules, the change occurs when an employee, spouse, or dependent gains or loses coverage eligibility for accident or health coverage and group-term life insurance. Therefore, a spouse that goes on an unpaid leave of absence, where no eligibility change takes place, would not constitute a reason for the participant to change their coverage elections.
When a participant gains coverage under another employer’s plan and revokes his or her election, a certification that coverage was actually obtained should be sought from the employee.
Regulations do allow a participant to revoke their election and receive, on a prospective basis, coverage under another benefit package option that provides similar coverage by another employer, such as a spouse’s or dependent’s employer, as similar coverage.
Note however, that the “Significant cost or coverage changes” section of the regulations do not apply to healthcare FSAs. Employees may only change their election to a healthcare FSA if any of the other five “Conditions for change” occurs and the resulting election change satisfies the consistence rule.
Additional changes allowed for Marketplace enrollment: A change is allowed for employees to prospectively revoke or change an election with respect to an employer’s accident or health plan if the employee wants to begin participation during open enrollment or a Special Enrollment Period, such as marriage or addition of dependent, to a Marketplace Qualified Health Plan (QHP). The new coverage in the QHP must be effective no later than the day immediately following the last day of the original coverage that is revoked.
HRAs, HSAs, Parking and Transportation Accounts, and 401(k) Plans
HRAs: Employees do not elect into HRA plans. Their eligibility for the HRA is based on the criteria outlined in the plan document. For example, the eligible group may be all those that selected a particular employer-sponsored group health plan. However, under certain conditions, participants in the HRA may suspend their participation in the HRA before the HRA coverage period begins and forgo payment or reimbursement by the HRA to perhaps participate in an HSA or to seek Premium Tax Credits for marketplace insurance coverage. Employees may also switch from single to family insurance coverage, or vise/versa. Employers may make changes to their HRA plans at any time during or at the beginning of the plan year.
HSAs and Parking and Transit Plans: It’s a lot less complicated for participants that have an HSA or are enrolled in parking and/or transit plans. Basically, an election in any of these types of accounts may be increased or decreased for any reason on a prospective basis.
401(k) Plans – inside and outside of a cafeteria plan Election, generally, can be changed on a per payroll basis without any sort of status change. The selection of the types of investment options for HSAs or 401(k) plans can be changed at any time from the plans’ portals.
Lastly, there may be one more avenue for changing an election to a cafeteria plan, when a mistaken election occurs. This would require clear and convincing evidence that a change is needed. For example, if a participant signed up for the dependent care benefit thinking it was for healthcare expenses of a dependent; although no child under the age of 13 resides in their home.
Of course, plan documents must be consulted to see when and how changes to elections may be made for any particular benefit plan.
The information contained in this memo is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.