“Election Lock” Solved For Participants Who Wish To Enroll In Marketplace Coverage

Background

Under Change of Status rules in effect prior to October 2014, a cafeteria plan may not allow an employee to revoke an election under the group health plan during a period of coverage solely to enroll in a Qualified Health Plan through a Marketplace or Exchange. Consequently, employees participating in benefits with non-calendar year plans might not be able to synchronize coverage to avoid an overlapping period of coverage or a period without coverage.

New Guidance

Notice 2014-55 published by the IRS on October 6, 2014 provides for additional permitted election changes for health coverage under § 125 cafeteria plans.  This Notice addresses two situations where an employee may revoke his employer-provided coverage under the cafeteria plan in order to enroll in coverage available under the Federal Marketplace.

1.  The first situation involves a participating employee whose hours of service are reduced so that the employee is expected to average less than 30 hours of service per week but for whom the reduction does not affect the eligibility for coverage under the employer’s group health plan. (This may occur, for example, under certain employer plan designs intended to avoid any potential assessable payment under § 4980H of the Internal Revenue Code.)
2. The second situation involves an employee participating in an employer’s group health plan who would like to cease coverage under the group health plan and purchase coverage through a Marketplace without that resulting either in a period of duplicate coverage under the employer’s group health plan and the coverage purchased through a Marketplace or in a period of no coverage.

This Notice 2014-55 permits a cafeteria plan to allow an employee to revoke his or her election under the cafeteria plan for coverage under the employer’s group health during a period of coverage in each of those situations provided specified conditions are met. This change does not permit a change in a prior election for the health flexible spending arrangement (FSA).

The Treasury Department and the IRS intend to modify the regulations under § 125 consistent with the provisions of this notice, but taxpayers may rely on this notice immediately.

Update Plan Docs By The End Of 2015 To Adopt New Rule

Like other cafeteria plan election changes under Treas. Reg. § 1.125-4, these changes are permissible, not required. To take advantage of this guidance, the cafeteria plan must be amended on or before the last day of the plan year in which elections are allowed (although it may be amended for a 2014 plan year any time on or before the last day of the 2015 plan year). The amendment can be effective retroactively to the first day of the plan year if the plan operates in accordance with this guidance and the employer informs participants of the change. However, in no event may an election revoke coverage on a retroactive basis.

NEO will provide appropriate plan document amendments to our clients upon request, as soon as approved language is available.