permi cost and coverage changes and miscellaneous events...cost and coverage events • significant...

5/8/2017

Copyright 2017 Employee Benefits Corporation

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2© 2017 Employee Benefits Corporation

Permi ed Elec on Changes Part II − Cost and Coverage Changes and Miscellaneous Events

5/8/2017


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Employee Benefits Corporation

The material provided in this webinar is by Employee Benefits Corporation and is for general information purposes only. The information does not constitute legal advice and may not be relied upon by anyone as such. Nor may the information be disseminated in any form.

Abigail Darwin, Esq.Compliance Consultant

© 2017 Employee Benefits Corporation 4

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Today’s Agenda:

• Review of Section 125 Plan Election Rules

• Cost and Coverage Events

• Other Permitted Election Change Events

• Miscellaneous Events

• Preview of Boot Camp Part 3

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Glossary of AcronymsAcronym Definition

ACA Affordable Care Act

CHIP Children’s Health Insurance Program

DCFSA Dependent Care Flexible Spending Account

FSA Flexible Spending Account

HIPAA Health Insurance Portability and Accountability Act

IND Account Individual Premium Account

IRC Internal Revenue Code

IRS Internal Revenue Service

LTD Long‐Term Disability Insurance


Review of Section 125 Plan Election Rules

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• IRC § 125 requires cafeteria plan elections to be made prior to the start of the plan year

–Open enrollment

–Prospective and irrevocable



• Exceptions:

– Mid‐year hires

• Must make elections before end of waiting period

• If eligible on day 1, election must be made within 30 days

–Election will be retroactive

– Permitted Election Change Events

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• 16 Permitted Election Change Events (Treas. Reg. § 1.125‐4)

• Election changes must be “on account of” and “consistent with” Event

–No time period specified for determining “on account of”

• BESTflex Plan Document provides 30 days

• Easier if time specified in cafeteria plan matches insurance

• No requirement to adopt any election changes in cafeteria plan

– If any/all are adopted, specify in plan document

–BESTflex Plan Document includes all 16 Events


Permitted Election Change Events:

Change in Status

Cost Changes With Automatic Increases/Decreases in Elective Contributions

Significant Cost Changes

Significant Coverage Curtailment (With or Without Loss of Coverage)

Addition or Significant Improvement of Benefit Package Option

Change in Coverage Under Other

Employer Plan

Loss of Group Health Coverage Sponsored by Governmental or Educational Institution

Changes in 401(k) Contributions

HIPAA Special Enrollments

COBRA Qualifying Events

Judgments, Decrees or Court Orders

Medicare or Medicaid Entitlement

FMLA Leaves of Absence

Changes in Pre‐Tax HSA Contributions

Reduction of Hours

Exchange Enrollment

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Cost and Coverage Events



• Cost and Coverage Events include:

– Cost Changes With Automatic Increases/Decreases in Elective Contributions

– Significant Cost Changes

– Significant Coverage Curtailment (With or Without Loss of Coverage)

– Addition or Significant Improvement of Benefit Package Option

– Change in Coverage Under Other Employer Plan

– Loss of Group Health Coverage Sponsored by Governmental or Educational Institution

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• Cost and Coverage Events allow election for qualified benefits other than health FSAs, including:

–Premiums

–DCFSA

– IND Accounts



• Cost Changes With Automatic Increases/Decreases in Elective Contributions

– “Cost changes”= OOP costs (e.g., premiums, cost of day care)

• Applies to increases/decreases due to:

– Insurance premiums (set by insurer)

– Insurance premiums (set by employer) for changed employment situation

–Employer subsidies

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• Cost Changes With Automatic Increases/Decreases in Elective Contributions

–Cannot change health FSA elections

– “Insignificant” cost changes allow for automatic changes to employee payroll deductions

• Plan document should specify this is allowed



• Significant Cost Changes

– Employees can only change elections in the case of “significant” cost increases/decreases

– “Significant” is not defined by the IRS

• Plan sponsors determine what is “significant”

–Take into account all “facts and circumstances”

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• Significant Cost Increase

– In the case of “significant” cost increases:

• Employee can increase elections to match the new coverage cost

– If employee does not want to pay increased cost of coverage:» Must elect similar coverage, if available

• “Similar coverage”= “coverage for the same category of benefits for the same individuals”

» If no similar coverage available, can drop plan and revoke election




– Example:

• Rubble Inc. has only one group health insurance plan

• Premium is $1,000/mo. for family‐level coverage

• Full‐time employees pay $250/mo.; part‐timers pay $500/mo.

• Fred has a family plan and switches from full‐time to part‐time

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– Example (cont.):

• If Rubble Inc. determines cost increase is “significant,” it could NOT automatically change Fred’s pre‐tax premium

• Fred could drop coverage & revoke pre‐tax premium election

– If Fred doesn’t drop coverage, Rubble could increase his premium

• Fred could NOT change his health FSA election



• Significant Cost Decrease

– In the case of a significant cost decrease:

• Employees not previously enrolled may enroll

• Participants who elected another option providing similar coverage may revoke and elect option with significantly decreased cost

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• Significant Cost Decrease

– Example:

• ABC Widget Company’s health insurance premium is decreasing significantly

• Bob, who was not previously enrolled, could now enroll

• Bob could NOT add or increase his health FSA election



• Significant Coverage Curtailment

–Requires “an overall reduction in coverage provided under the plan so as to constitute reduced coverage generally”

• Does not apply to health FSA

– Two types of Significant Coverage Curtailment Events:

• Significant Coverage Curtailment With Loss of Coverage

• Significant Coverage Curtailment Without Loss of Coverage

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– Loss of coverage means a complete loss of coverage under a benefit option

• Employee must enroll in similar employer plan, if available

• If no similar employer plan, can drop plan and revoke pre‐tax election




– Examples:

• Employer drops health, dental or vision plan

• HMO ceases to be available where participant lives

• Daycare provider closes

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–Participant can stay in the same plan

• If participant doesn’t want to stay in same plan:

–Must enroll in similar employer plan, if available

– If no similar employer plan available, cannot revoke election or drop current plan




– Examples:

• A hospital drops out of the HMO network

• Employer significantly increases health plan deductible

• Co‐pays or out‐of‐pocket cost‐sharing amounts under the plan significantly increase

• Daycare provider reduces hours open

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• Addition or Significant Improvement of Benefit Package Option

– Eligible employees can enroll, even if not previously enrolled in the cafeteria plan or the benefit option

– Employees can revoke existing election and elect coverage under the new or improved benefit package option



• Addition or Significant Improvement of Benefit Package Option

– Examples:

• Employer adds dental plan

• Co‐pays and/or deductibles decrease

• Increase in medical providers available in network

• Employer adds HMO option

• Employer adds on‐site daycare center

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• Change in Coverage Under Other Employer Plan

– Examples of another employer plan include:

• Spouse’s employer’s plan

• Participant’s second employer’s plan

• Dependent’s employer’s plan

• Parent’s employer’s plan (if participant is a dependent)

• Another health insurance plan offered by the same employer




–May arise when other employer plan has different plan year than employee’s plan

– If coverage is lost under the other plan, employee can enroll or increase election in his/her own employer’s plan

• Can’t change health FSA elections

– If coverage is gained under the other plan, the employee can drop or decrease election in his/her own employer’s plan

• Can’t change health FSA elections

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– Example:

• Mary is enrolled in her employer’s health plan

• Mary elected $1,000 in her health FSA

• Mary’s husband, Joe, is eligible but not enrolled in his employer’s health plan

• Joe enrolls himself and Mary in his employer’s health plan during open enrollment





• This is not a Status Change Event, because no one has gained or lost eligibility

• This is a Coverage Change Event, so Mary can drop her employer’s health plan and her pre‐tax deductions

• Mary can’t change her health FSA election

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• Contrast this with a Change in Status Event resulting from spouse gaining eligibility under employer’s plan:

– Example:

• Mary is enrolled in her employer’s health plan

• Mary elected $1,000 in her health FSA

• Mary’s husband, Joe, starts a new job and is newly eligible for his employer’s health plan

• Joe enrolls himself and Mary in his employer’s family health insurance plan




• This is a Change in Status Event, because he has gained eligibility for his employer’s health insurance

• If Joe enrolls Mary in a family plan, she can drop her employer’s health plan and her pre‐tax deductions

• Mary can also change her health FSA election

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• Loss of Group Health Coverage Sponsored by Governmental or Educational Institution

–Only applies to a loss of coverage, NOT a gain

–Allows an employee to make an election to add coverage for the employee, spouse or dependent if coverage is lost under a group health plan sponsored by a governmental or educational institution

• Tag‐along rules may apply

–Only allows changes to group health plans



• Loss of Group Health Coverage Sponsored by Governmental or Educational Institution

– Examples:

• College student insurance

• CHIP

• A medical care program of an Indian tribal government, the Indian Health Service or a tribal organization

• A foreign government group health plan

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Other Permitted Election Change Events


Permitted Election Change Events:

Change in Status

Cost Changes With Automatic Increases/Decreases in Elective Contributions

Significant Cost Changes

Significant Coverage Curtailment (With or Without Loss of Coverage)

Addition or Significant Improvement of Benefit Package Option

Change in Coverage Under Other

Employer Plan

Loss of Group Health Coverage Sponsored by Governmental or Educational Institution

Changes in 401(k) Contributions

HIPAA Special Enrollments

COBRA Qualifying Events

Judgments, Decrees or Court Orders

Medicare or Medicaid Entitlement

FMLA Leaves of Absence

Changes in Pre‐Tax HSA Contributions

Reduction of Hours

Exchange Enrollment

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• Other Permitted Election Change Events: 401(k) Election Changes

–Cafeteria plan can allow employees to change 401(k) contributions during the plan year

– Can’t change elections for other component plans

–Rare for 401(k) plan to be part of cafeteria plan



• Other Permitted Election Change Events: HIPAA Special Enrollment Rights

–Cafeteria plan can let employees revoke election for the group health plan and make new election if they experience certain types of events

– This Event applies to group health plans that are subject to HIPAA’s portability provisions (e.g., health insurance)

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–Arise as a result of:

• Losing eligibility for coverage under a group health plan or health insurance

• Acquiring new spouse or dependent

• Losing eligibility for CHIP or Medicaid

• Gaining eligibility for state premium assistance subsidy from Medicaid or CHIP




– Sometimes, HIPAA Special Enrollment Rights overlap with other Permitted Election Change Events

• Important differences to note:

–Required vs. permissive changes

–Retroactive vs. prospective changes

–Duration of enrollment period

–Tag‐along rights

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• Other Permitted Election Change Events: COBRA Qualifying Event

–Cafeteria plan can allow election changes for COBRA qualifying events

• May increase pre‐tax contributions for coverage if a qualifying event happens to employee, spouse or dependent

–Must remain eligible for cafeteria plan



• Example:

– Tom goes from full‐time to part‐time, loses health insurance and elects COBRA

–He remains eligible to continue participating in cafeteria plan

–He can increase salary reductions mid‐year to pay for COBRA

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• Other Permitted Election Change Events: Judgments, Decrees and Court Orders

–Cafeteria plan can/should allow election changes required by a judgment, decree or court order

• Divorce, separation, annulment, change in custody

–Applies to elections for plans providing accident or health coverage, including health FSAs

–Applies to orders relating to coverage for children, not spouses



• Other Permitted Election Change Events: Medicare or Medicaid Entitlement

–Cafeteria plan can allow election changes to group health plans, due to loss/gain of Medicare/Medicaid

• Health/dental/vision insurance

• Health FSA

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• Other Permitted Election Change Events: Pre‐Tax HSA Contributions

–HSAs aren’t subject to Permitted Election Change Rules

–Cafeteria plan can/should allow prospective changes to HSA contributions on monthly basis

–Would not allow election changes for other plan components



• Other Permitted Election Change Events: Mid‐Year Marketplace Elections

–Cafeteria plans can allow employees to revoke employer’s group health plan due to:

• Reduction in hours (below 30) during stability period with intent to enroll in another health insurance plan; or

• Enrolling in an ACA Marketplace plan when cafeteria plan has non‐calendar plan year

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Miscellaneous Events



• Events that are NOT Permitted Election Change Events but that MAY allow changes to elections under a cafeteria plan include:

–Mistakes affecting an election;

– Failure to pass medical underwriting; and

– Failure to pass nondiscrimination testing

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• Mistaken Elections

–Permitted Election Change Regulations do not allow changes based solely on the fact that a mistake occurred

• However, IRS allows election changes when there is “clear and convincing” evidence a mistake was made

• “Clear and convincing” standard is easier for an employer to satisfy

–Employee’s subjective intent cannot be known» Elections can be revoked in cases of impossible elections (e.g., employee

with no dependents elects DCFSA)




– Employers decide if a mistake was made and whether to fix it

• “Facts and circumstances”

• Should set internal standards and policies

–Factors to consider:» Employee’s past elections and benefit usage

» Plausible evidence of a clerical mistake

» Employee’s truthfulness

» Time elapsed since first payroll date after election

» Employee’s changed circumstances

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– Employer clerical and administrative election mistakes can be undone

• If too much/little salary was withheld and not discovered until next plan year, employer can make correction in subsequent plan year

–Easier if employee still works there and/or is willing

–W‐2 may need to be amended

–Not correcting error could violate irrevocability rule/disqualify plan

–Can adjust deduction, not election




–Mistakes about laws, plan rules, coverage or tax treatment cannotbe fixed

• Example: Joe Employee decides to pay pre‐tax for LTD coverage, not realizing benefits will be taxable when paid out

–“Mistake” cannot be undone

• Example: Janet Employee incorrectly believes that she can change her health FSA election prior to first payroll of the new plan year

–Janet can’t change health FSA election after start of plan year

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• Failure to Pass Medical Underwriting

–Participant may change election if can’t pass medical underwriting

• Example: Ted Employee fails required physical exam for LTD

–Ted can revoke his LTD premium election

–Applies to employer’s non‐health group plans, such as life and disability, and related pre‐tax premiums

• Note: HIPAA prohibits medical underwriting for group health plans



• Election Changes Needed to Pass Nondiscrimination Testing

– Failing nondiscrimination testing is not a Permitted Election Change Event

– Employer can revoke or reduce highly‐compensated and key employees’ elections prior to plan year end to pass test

– Election adjustments must be uniform

–Affected employees would be taxed on changed election amount

– Specify in plan document

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Preview of Boot Camp Part 3


Permitted Election Changes‐Leaves of Absence

• Boot Camp Part 3: Leaves of Absence

–How do Leaves of Absence and Permitted Election Changes work together?

–What questions should be asked prior to leave?

–How does FMLA affect Permitted Election Changes?

–How do you determine the Qualifying Event?

• Be sure to register!

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Questions?

Thank you for attending!!Any questions can also be addressed by e‐mail or phone:

Compliance Department

(800) 346 ‐2126

[email protected]

Visit our online blog:

http://www.ebcflex.com/NewsCenter/ComplianceBuzz.aspx

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