Under Notice 2014-55, the Internal Revenue Service (IRS) will now permit a cafeteria plan to allow an employee to revoke his election for coverage under the employer's group health plan in order to purchase a qualified health plan offered through the Marketplace (formerly referred to as the Exchange) under the Affordable Care Act (ACA). The guidance applies to pre-tax elections other than for a health care flexible spending account (Health FSA). The IRS will be modifying its regulations, but taxpayers may rely on the notice.

Background

Generally, elections under a cafeteria plan must be irrevocable for the plan year to which they relate except to the extent that optional changes are permitted as a result of a change in status. Although certain changes are permitted 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 qualified health plan through the Marketplace. As a result, an employee enrolled in a noncalendar year plan or who otherwise obtained coverage during the plan year might not be able to coordinate the change in coverage to avoid overlapping coverage.

Notice 2014-55 provides that, in two cases, a cafeteria plan may allow an employee to prospectively revoke an election of coverage under a group health plan (other than a Health FSA) that provides minimum essential coverage (MEC) if certain conditions are met.

Revocation Due to Reduction in Hours of Service

First, revocation is permitted in circumstances where an employee’s hours of service are reduced (e.g., full-time to part-time) but the change does not affect eligibility. The conditions for this exception are:

  • The employee has been in an employment status under which 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 the reduction does not result in the employee ceasing to be eligible under the group health plan; and
  • The revocation of the election 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 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.

The plan may rely on the reasonable representation of an employee who is reasonably expected to have an average of less than 30 hours of service per week for future periods that the employee and related individuals have enrolled or intend to enroll in another plan that provides MEC for new coverage that is 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 the Marketplace

Second, revocation is also permitted in circumstances where the revocation avoids a period of duplicate or no coverage. The conditions for this exception are:

  • The employee is eligible during a special enrollment period to enroll in a qualified health plan through a Marketplace, 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 Marketplace 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 plan may also rely on the reasonable representation of an employee who has an enrollment opportunity for a qualified health plan through a Marketplace that the employee 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.

Amendment Required

It is important to note that a cafeteria plan must be amended to provide for these election changes. The amendment must be adopted on or before the last day of the plan year in which the elections are allowed and may be effective retroactively to the first day of that plan year, if the cafeteria plan operates in accordance with the guidance 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.