ACA News & Publications

ACA Pathways: IRS Expands Rules for Cafeteria Plan Mid-year Election Changes

September 22, 2014

On September 18, 2014, the Internal Revenue Service, in conjunction with the Department of the Treasury (collectively IRS) issued Notice 2014-55, providing two additional opportunities for employees and their dependents to drop their coverage mid-year under their employer group health plan to enroll in a qualified health plan through a Health Insurance Exchange (Marketplace).

To expand access to Marketplace coverage, Notice 2014-55 allows employees to revoke a cafeteria plan election to obtain coverage through the Marketplace on a prospective basis in the following situations.

  • Reduction in Hours. When an employee’s hours of service are reduced so that he or she is expected to average less than 30 hours of service per week, but the reduction does not affect his or her eligibility for coverage under the employer’s group health plan.
  • To Purchase Marketplace Coverage. When an employee seeks to cease coverage under the employer’s group health plan and purchase coverage through the Marketplace, without having to incur a period of either duplicate coverage or no coverage.

Certain conditions must be met for the change to be permitted, including that the employer group health plan must provide minimum essential coverage (MEC) and cannot be a health care flexible spending account. Also, an election to revoke coverage on a retroactive basis is not allowed.

Change in Status Due to Reduction in Hours of Service

Rationale

Under the Affordable Care Act (ACA)’s employer shared responsibility ( “pay or play”) rules, an applicable large employer (ALE) is required to offer coverage to its full-time employees and their dependents or potentially pay a penalty should that employee receive a premium tax credit (subsidy) for coverage purchased in the Marketplace.

Under the play or pay rules, an employee who works on average at least 30 hours per week is considered full-time. To determine full-time status, ALEs are permitted to use either the monthly measurement method or look-back measurement method. Under the look-back measurement method, an employee who works, on average, at least 30 hours of service per week during a measurement period must be treated as full-time during a subsequent stability period, regardless of the employee’s hours of service during the stability period.

Thus, under the look-back measurement method, an employee could experience a change in employment status (e.g., a change from a full-time position to a part-time position) or other reduction in hours below the average 30 hours per week threshold (e.g., the employee is a variable hour employee) during the stability period. However, the reduction in hours would not result in a change in an employee’s eligibility for the group health plan, at least for some period of time. Therefore, under the current cafeteria plan regulations, the employee would not have been able to change his or her elections during the period of coverage.

Conditions for Election Changes Due to Reduction in Hours of Service

As a result of this new guidance, a cafeteria plan may allow an employee to prospectively revoke an election of coverage under a group health plan if both of the following conditions are met:

  • An employee who was reasonably expected to average at least 30 hours of service per week has a change in employment status so that he or she will reasonably be expected to average less than 30 hours of service per week after the change (even if that reduction does not result in him or her 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. The new coverage must be effective no later than the first day of the second month after the month in which the original coverage is revoked.

A cafeteria plan may rely on an employee’s reasonable representation that he or she and related individuals have enrolled (or intend to enroll) in another plan that provides MEC within the required timeframe.

Change In Status To Purchase Coverage In The Marketplace

Rationale

Under the current change in status rules, 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 Marketplace plan. This rule can cause issues for an individual in a non-calendar year plan, because the Marketplace enrollment rules do not allow individuals to purchase coverage that would necessarily begin after the end of the non-calendar cafeteria plan year. Enrolling in a plan during the Marketplace open enrollment might require these individuals to have either overlapping coverage or a period without any coverage.

Also, even though current regulations permit employees to revoke an election and make a new election that corresponds with special enrollment rights, special enrollment rights relate only to enrollment in another group health plan, not to enrollment in a plan offered through the Marketplace.

Conditions for Election Changes Due to Exchange Enrollment

A cafeteria plan may now allow an employee to prospectively revoke an election of coverage under a group health plan if both of the following conditions are met:

  • The employee is eligible for special enrollment in a Marketplace plan OR the employee wants to enroll in an Marketplace plan 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 Marketplace plan. The Marketplace coverage must be effective beginning no later than the day immediately following the last day of the original coverage that is revoked.

A cafeteria plan may rely on the reasonable representation of an employee who has an enrollment opportunity for an Exchange plan, that he or she and related individuals have enrolled (or intend to enroll) in a Marketplace plan for new coverage that is effective within the required timeframe.

Plan Amendments Required

To allow the new permitted election changes under Notice 2014-55, a cafeteria plan must be amended to provide for the election changes. In general, the amendment must be adopted on or before the last day of the plan year in which the elections are allowed. It may be effective retroactively to the first day of that plan year, if:

  • The cafeteria plan operates in accordance with guidance under Notice 2014-55; and
  • The employer informs participants of the amendment.

However, a cafeteria plan may be amended to adopt the new permitted election changes for a plan year that begins in 2014 at any time on or before the last day of the plan year that begins in 2015.

Effective Date

The guidance contained in Notice 2014-55 is effective September 18, 2014. The IRS intends to amend the current cafeteria plan regulations to reflect the guidance in this Notice. However, taxpayers may rely on the guidance in Notice 2014-55 until further guidance is issued.

For More Information
For more information about this ACA Pathways or about any other health care reform-related provisions, please contact your Burnham Benefits consultant or Burnham Benefits at:

IRS Notice 2014-55 can be found at www.irs.gov/pub/irs-drop/n-14-55.pdf.

Burnham Benefits
949.833.2983
inquiries@burnhambenefits.com


This ACA Pathways is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice. The information contained in this ACA Pathways includes emerging health care news from a limited perspective and does not encompass all views. The information was selected from a wide range of sources selected on the basis of their potential impact on employers and/or their employee benefit plans. For more information, please contact Burnham Benefits.

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