Earlier this year, the IRS announced that employers are permitted to allow employees to drop coverage under the employer’s fiscal year group health plan and sign up for marketplace coverage. The employer may do this based on the employee’s “reasonable representation” that he or she (and family members) have enrolled or intend to enroll in marketplace coverage effective immediately after the employer coverage ends. An employer is not required to permit this change – it’s optional. But employees need to know now if the employer will permit the change in order to consider whether marketplace coverage will better suit the family’s needs and the federal law’s “individual mandate” – the requirement to have health plan coverage or face a penalty.
Fiscal year health plans (i.e., those whose plan year is other than the calendar year) generally may wait until the first day of the 2015 Plan Year to worry about compliance with the “pay or play” rules of the Affordable Care Act. But the IRS announcement allowing employees to drop their coverage to go to the marketplace gives rise to a decision now by employers with fiscal year group health plans – do I let my people go to the marketplace?
More technically, the question is – do I allow my Section 125 Plan to permit an employee to revoke his election of coverage under my plan and pick up coverage under the marketplace? Section 125 of the tax code permits employees to choose between cash (a taxable benefit) and having that cash applied toward the employee’s premium for group health coverage (a nontaxable benefit) or for medical or dependent care expenses (also nontaxable). A well-known and somewhat-despised aspect of the Section 125 rules is that an employee’s election of group health coverage for the plan year must be irrevocable except for certain life changes (e.g., marriage, divorce, death, birth or adoption of child) and certain plan coverage changes, including under a spouse’s plan. The IRS now has expanded the list to include “going to the marketplace to obtain coverage when the employer has a fiscal year plan.”
There are reasons that an employer wouldn’t want to allow this change. The employer may be concerned that the employee won’t actually sign up for (or later will drop) the marketplace coverage, or that the marketplace coverage won’t be as valuable as the employer’s coverage. An employer may worry that many departing employees might adversely affect the employer’s premium rates or self-funded plan projections. The employer simply may not want the administrative hassle of dealing with this change. It’s fine for the employer to decide that it does not want to allow the election change even though the IRS will permit it. But for many employers, the added flexibility for employees is welcome.
The IRS will allow this change in late 2014 even if the Section 125 Plan is not amended formally until 2015, providing a little extra time to fully implement the change.