Cafeteria Plans: Change in Status Events and Permissible Employee Election Changes

Posted: November 14, 2022 in Compliance , Employee Benefits

Cafeteria plans are governed by IRS Code Section 125 and allow employers to help employees pay for expenses such as health insurance with pre-tax dollars. Employees can choose between a taxable benefit (such as cash) and two or more specified pre-tax qualified benefits (health insurance, for example). Employees can select the benefits they want, much like an individual standing in a cafeteria line.

IRS rules limit the types of benefits that can be offered through a cafeteria plan to:

Coverage under an accident or health plan (which can include traditional health insurance, health maintenance organizations (HMOs), self-insured medical reimbursement plans, dental, vision, and health flexible spending arrangements (HFSAs)
Dependent care assistance benefits (DCAPs)
Group term life insurance
Paid time off, which allows employees the opportunity to buy or sell paid time off days
401(k) contributions (subject to certain restrictions)
Adoption assistance benefits
Health savings accounts (HSAs)

Employers cannot offer scholarships, group term life insurance for non-employees, transportation and other fringe benefits, long-term care, and most health reimbursement arrangements (unless very specific rules are met by providing one in conjunction with a high deductible health plan, or certain individual coverage health care arrangements (ICHRAs)). IRS rules also prohibit offering benefits that defer compensation.

Cafeteria plans are not subject to ERISA, but all or some of the underlying benefits or components under the plan can be.

MAKING ELECTION CHANGES

Only an eligible employee can make elections, but they can choose benefits that also cover other individuals such as spouses or dependents. Elections, with an exception for new hires and for HIPAA special enrollment periods, must be prospective. Also, cafeteria plan elections are irrevocable and cannot be changed during the plan year, unless a permitted change in status occurs. Note: The IRS has informally stated that mandatory two- year elections for standalone dental or vision plans that meet certain requirements are permitted.

Plans may allow participants to change elections due to:

Change in legal marital status
Change in number of dependents
Change in employment status
A dependent satisfying or ceasing to satisfy dependent eligibility requirements
Change in residence
Commencement or termination of adoption proceedings (only for adoption assistance benefits)

Plans may also allow participants to change elections based on the following changes that are not a change in status:

Significant cost changes
Significant curtailment (or reduction) of coverage
Addition or improvement of benefit package option
Change in coverage of spouse or dependent under another employer plan
Loss of certain other health coverage (for example, government provided coverage, such as Medicaid)
HIPAA special enrollment rights (contains requirements for plans subject to HIPAA)
Medicare Part D Disclosure
COBRA qualifying event
Judgment, decrees, or orders (like qualified medical child support order (QMCSO)
Entitlement to Medicare or Medicaid
Family Medical Leave Act (FMLA) leave
Pre-tax health savings account (HSA) contributions (employees are free to change their HSA contributions whenever they wish, in accordance with their payroll/accounting department process)
Reduction of hours
Marketplace enrollment

Together, the change in status events and other recognized changes are considered “permitted election change events.”

Common changes that do not constitute a permitted election change event are:

A provider leaving a network (unless, based on very narrow circumstances, it resulted in a significant reduction of coverage)
A legal separation (unless the separation leads to a loss of eligibility under the plan), or commencement of a domestic partner relationship
A change in financial condition

There are some events not in the regulations that could allow an individual to make a mid-year election change, such as a mistake by the employer or employee, or needing to change elections in order to pass nondiscrimination tests. To make a change due to a mistake, there must be clear and convincing evidence that the mistake has been made. For instance, an individual might accidentally sign up for family coverage when they have no children, or an employer might withhold $100 per pay period for a flexible spending arrangement (FSA) when the individual elected to withhold $50.

Plans are permitted to make automatic payroll election increases or decreases for insignificant amounts in the middle of the plan year, so long as automatic election language is in the plan documents. Employers should carefully consider all facts and circumstances when deeming an amount insignificant.

Plans should consider which change in status events to allow, how to track change in status requests, and the time limit to impose on employees who wish to change an election.

Cafeteria plans are not required to allow employees to change their elections; but plans that do allow changes must follow IRS requirements. These requirements include consistency, plan document allowance, documentation, and timing of the election change.

CONSISTENCY

In order to make the change, an employee must have experienced the specified change or event, and the requested change must be consistent with the change or event.

Example: Susan is a full-time benefits eligible employee of The Oyster House. Susan becomes Medicare eligible and wishes to make changes to her cafeteria plan elections. If the plan allows, she would be permitted to make changes to any benefit that provides accident or health coverage, including a health FSA. She would not be permitted to make changes to other elections such as dependent care, paid time off, or group life insurance because changing these elections is not consistent with Medicare eligibility.

The consistency rules require that an election change be due to and correspond with the change in status that affects eligibility for coverage under the plan. There are relaxed consistency rules for group term life insurance, dismemberment and disability coverage. There are also special consistency rules for election changes when DCAP or adoption assistance plan expenses are affected; changes due to divorce, death of a spouse or dependent, or a dependent’s loss of eligibility; and a limitation on election changes decreasing or ending coverage because a new family member has become eligible.

DCAP elections cannot be changed because an unemployed individual enrolls in educational courses. If a medical plan automatically terminates dependents when they reach age 26, there would be no qualifying event because no changes would need to be made by the employee.

Plan Documents.

If an individual has a permitted election change event and the desired change is consistent with the event, but the cafeteria plan document does not recognize the permitted election change event (or the plan does not allow individuals not already on the plan to elect benefits mid-year), the election change is not allowed. If the plan recognizes the change event, not only does the cafeteria plan document have to allow the change, but the plan documents of the component benefit must allow it as well (such as the underlying plan documents for the group health plan).

Documentation and Timing.

If the individual has a permitted election change event, the desired change is consistent with the event, and the plan documents allow the change, the plan should document that all requirements have been met. A signed certification by the employee is sufficient. Under ERISA, these records should be kept for at least eight years. Employees are permitted to make changes electronically by self-certifying. The employer should keep electronic records of this change.

Plan administrators should administer election changes involving same-sex spouses in the same manner that they handle election change requests for individuals with opposite-sex spouses.

OVERVIEW OF CONSISTENT CHANGES
Type of Event	Permitted Change
Change in status event (marital status, number of dependents, employment status, dependent eligibility change, change in residence, commencement or termination of adoption proceedings)	Election changes for all qualified benefits (except commencement or termination of adoption proceedings limited to changing adoption assistance election)
Significant cost change	Changes to all qualified benefits other than health FSAs
Significant coverage curtailment or reduction	Changes to all qualified benefits other than health FSAs
Addition or significant improvement of benefit	Changes to all qualified benefits other than health or dependent care FSAs
Change in coverage under another employer plan	Changes to all qualified benefits other than health FSAs
Involuntary loss of health coverage (such as coverage sponsored by the government or educational institution)	Election changes for any group health plans
HIPAA special enrollment	Changes for any group health plans that are not an excepted benefit under HIPAA
COBRA qualifying event	Election changes for any group health plans subject to COBRA (includes health care FSAs)
Judgments, decrees, or orders	Election changes for accident or health coverage (includes FSAs)
Medicare/Medicaid entitlement	Election changes for any accident or health coverage
FMLA leave of absence	Election changes to accident or health plan coverage, including FSAs
Reduction of hours	Changes for group health plans (not FSAs) that provide minimum essential coverage under the ACA
Marketplace enrollment	Changes for group health plans (not FSAs) that provide minimum essential coverage under the ACA (other rules apply)

CHANGE IN STATUS EVENTS

As mentioned above, plans may allow participants to change elections based on an IRS-specified list of change in status events.

Change in Legal Marital Status.

Both same-sex and opposite-sex marital status changes are change in status events. Legal separations (unless the legal separation leads to loss of eligibility under the plan) and the commencement and termination of a domestic partnership are not. There is a narrow exception if a domestic partnership changes an individual’s tax status. If a domestic partner qualified as a tax dependent for health coverage purposes, this could trigger a permitted election change event.

Change in the Number of Dependents.

The change in the number of dependents can trigger a permitted election change event. Birth, adoption, or placement for adoption will likely trigger a HIPAA special enrollment right, which creates a responsibility for plans subject to HIPAA. “Dependent” refers to a tax dependent under IRS Code Section 152, with an exception for accident and health coverage, under which a child to whom IRS Code section 152(e) applies is treated as a dependent of both parents.

Change in Employment Status.

A change in employment status that affects an individual’s eligibility for a benefit is a permissible change in status event. The following events are a change in employment status of an employee (or their spouse, or dependent):

Termination or beginning of employment
Strike or lockout
Return from or start of an unpaid leave of absence
Change in worksite

If benefits eligibility is dependent upon employment status, and that status changes (such as a move from full time to part-time), this can be a change in status event. However, unless a plan-allowed “reduction in hours or cost change event” occurs when an individual becomes part-time but is still benefits eligible, it is not a qualifying event.

Dependent Satisfying or Ceasing to Satisfy Dependent Eligibility Requirements.

If a tax dependent satisfies or ceases to satisfy the requirement for coverage due to aging out, changing student status, marriage, etc., this is a change in status event. Practically speaking, due to the ACA’s requirement to provide health coverage to children under the age of 26, marriage and student status changes are unlikely to trigger a qualifying event for health coverage. This might not be the case for other benefits such as vision or dental coverage.

Change in Residence.

A change in residence that affects eligibility for coverage would be a permitted election change event. The move must result in a loss of eligibility for coverage. FSAs cannot be changed due to a residence change. If, for example, an individual was covered by an HMO and moved out of the network of providers, the employee could be permitted to drop coverage (if no other coverage was offered by the employer) or elect different coverage.

Commencement or Termination of Adoption Proceedings.

For purposes of adoption assistance provided through a cafeteria plan, the commencement or termination of an adoption proceeding is a permitted election change event.

Continue Reading this SSG Compliance Advisor to learn more about other events that allow a change in elections: