The Treasury Department and the IRS had a busy week issuing no less than five Affordable Care Act guidance items, consisting of:
- Filer instructions for Form 8962 (Premium Tax Credit/Advanced Premium Tax Credit);
- Filer instructions for Form 8965 (Exemptions);
- a Notice on the Patient-Centered Outcomes Research Institute Fee;
- a Notice on Additional Permitted Election Changes for Health Coverage under § 125 Cafeteria Plans; and
- a Notice on Shared Responsibility for Employers Regarding Health Coverage – Approach to Changes in Measurement Periods/Methods.
This post addresses item (iv), i.e., IRS Notice 2014-55 (relating to modifications to qualifying events for cafeteria plan relief). Next week’s post will explain item (v) relating to employees changing status under the Employer Shared Responsibility rules implementing the look-back measurement method.
With so much attention being paid to compliance with the Affordable Care Act’s Employer Shared Responsibility rules, it is sometimes easy to forget that these are not the only rules that govern the maintenance and operation of employer-sponsored group health plans. In the case of mid-year cafeteria plan elections, however, the Act and prior law do not mesh well. In particular, the concept of a “stability” period (introduced by the final employer shared responsibility rules) contemplates that an employer might continue to offer coverage despite a reduction in hours. This is something of a novel concept. Moreover, that employees have a new coverage option from public health exchanges was not a possibility when final regulations governing mid-year election changes under cafeteria plans were promulgated.
Cafeteria plan rules
Cafeteria plans are generally required to provide that elections are irrevocable during a period of coverage (i.e., the plan year) except in certain optional instances involving changes in an employee’s status or changes in cost or coverage. A cafeteria plan may allow an employee to revoke an election during a period of coverage and make a new election for the remaining portion of the period, if—
- A change in status (including a change in employment status) occurs, and
- The election change satisfies certain consistency requirements.
A change in employment status is limited to a change in an individual’s employment status that results in a change in the individual’s eligibility for coverage under the group health plan. So a change in employment status that does not result in an employee either becoming or ceasing to be eligible for coverage under the group health plan, as is the case during a stability period, is not a change in status for which a plan may allow the employee to revoke an election.
The consistency rules are satisfied only if the individual enrolls in the coverage for which the individual is newly eligible. That is, an individual gaining eligibility for coverage under a group health plan cannot use that change in status to revoke coverage entirely.
The employer shared responsibility rules
The Act’s employer shared responsibility rules subject applicable large employers to assessable payments if an employer fails to offer minimum essential coverage to its full-time employees and one or more full-time employees qualifies for a premium tax subsidy from a public exchange. An employer may use the look-back measurement method to determine the status of an employee as full-time or not full-time. Under the look-back measurement method, an employee determined to be full-time based on hours of service during a measurement period must be treated as a full-time employee during a subsequent stability period, regardless of the employee’s hours of service during the stability period. Accordingly, under the look-back measurement method, an employee could have a change in employment status (for example, a change from a full-time position to a part-time position) resulting in a reduction in hours that does not change the employee’s status as a full-time employee. Where the look-back measurement method is applied, the change in employment status during a stability period does not result in a change in an employee’s eligibility for the group health plan. Thus, the change in employment status in this instance would not allow the employee to change the employee’s election under the cafeteria plan during the period of coverage.
Interaction with enrollment in a Qualified Health Plan
Under the current rules governing cafeteria plan mid-year election changes, 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. Thus, an individual enrolled through a cafeteria plan in a group health plan with a non-calendar plan year might not be able to synchronize the change in coverage to avoid an overlapping period of coverage or a period without coverage because the open enrollment period rules for public exchange Marketplaces don’t permit the purchase of coverage beginning at the end of the non-calendar cafeteria plan year other than where an individual has special enrollment rights (birth, marriage, or adoption of a child).
Notice 2014-55 addresses two specific situations in which a cafeteria plan participant may wish to revoke coverage mid-year.
- Revocation due to reduction in hours of service. 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.
- Revocation due to enrollment in a Qualified Health Plan. 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 public exchange 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.
Revocation due to reduction in hours of service
A mid-year election change based on reduction in hours of service requires that:
- The employee was reasonably expected to average at least 30 hours of service per week and there is a change in that employee’s status so that the employee 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 the employee 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 minimum essential coverage, with the new coverage effective no later than the first day of the second month following the month that includes the date the original coverage is revoked.
Importantly, due to the consistency requirement that applies to mid-year cafeteria plan election changes, an employee in a stability period who reduces hours may not drop coverage altogether. Instead, he or she must get coverage elsewhere—i.e., either through a public exchange, coverage under a spouse’s plan, or some other source.
The notice permits the plan to rely on the “reasonable representation” of the employee that he or she has enrolled or intends to enroll in other coverage effective no later than the first day of the second month following the month that includes the date the original coverage is revoked.
Revocation due to enrollment in a Qualified Health Plan
A mid-year election change based on enrollment in a Qualified Health Plan requires that:
- The employee is eligible for a special enrollment period to enroll in a Qualified Health Plan, or the employee seeks to enroll in a Qualified Health Plan through a Marketplace 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 Qualified Health Plan through a public exchange for new coverage that is effective beginning no later than the day immediately following the last day of the original coverage that is revoked.
The notice permits the plan to rely on the “reasonable representation” of the employee that he or she (and related individuals) have enrolled or intend to enroll in a Qualified Health Plan for new coverage that is effective beginning no later than the day immediately following the last day of the original coverage that is revoked.
While there are certainly much more high profile questions that employers face as they work toward complying with the Affordable Care Act, Notice 2014-55 is nevertheless welcome guidance. The notice provides clear, and (it seems to us) workable, rules that will enable employers to coordinate cafeteria plan elections with the look-back measurement method. The guidance also comes well in advance of the time that it will be needed. The changes made by Notice 2014-55 will of course require cafeteria plan amendments, which means that there is at least one more item for the compliance checklist.