The Internal Revenue Service has issued Notice 2014-55 to permit new health plan elections in two situations where they were not previously allowed.
Under section 125 of the Internal Revenue Code of 1986, as amended, (Code) and current regulations, an employer may allow an employee to change his or her pre-tax cafeteria plan election for health care if:
- The employee’s status changes from full time to part time, and he or she loses coverage as a result of the change in status; or
- The employee becomes eligible for special enrollment rights (for example, the employee becomes eligible for Medicaid or a child becomes eligible for the State Children’s Health Insurance Program).
However, under the Patient Protection and Affordable Care Act (PPACA), a change in an employee’s status from full time to part time may not result in a loss of coverage if the employer uses a “look-back” methodology for determining if the employee is full time or part time, because the employer continues to offer the employee coverage during a “stability” period. Consequently, the employee would not be permitted to change his or her pre-tax cafeteria plan election under the existing rules. Similarly, under the regulations, the opportunity to change elections is not available if the employee newly qualifies to enroll in a qualified health plan offered through a federal or state health insurance exchange (an Exchange) because that is not protected by special enrollment rights for an employer plan. The Obama Administration was concerned that, in certain circumstances, it would be beneficial for an employee to waive employer coverage and choose to enroll in a qualified plan through an Exchange. For example, an employee who marries or acquires a new dependent may be better off with a policy under the Exchange, if the employer’s coverage of spouses or dependents is not subsidized or is otherwise limited.
IRS NOTICE 2014-55
Under Notice 2014-55, employers now can allow an employee to revoke a pre-tax election for health plan coverage (other than a flexible spending account), if:
- A full time employee’s status changes so that he or she is reasonably expected to average less than 30 hours of service per week but the change does not immediately result in the employee’s loss of employer-provided coverage. In this case, the employee may drop the employer coverage as long as he or she represents that he or she will be enrolled in new “minimum essential coverage” no later than the first day of the second month following the date the employer’s coverage is revoked; or
- The employee is eligible to enroll in a qualified health plan through an Exchange (or wants to enroll during the Exchange’s open enrollment), provided that the employee represents that he or she will be enrolled in coverage through an Exchange no later than the day immediately following the loss of the employer coverage. (If an employer uses the calendar year as the “stability” period, this rule generally will affect only employees who have a right to enroll in the Exchange during a special enrollment period for the Exchange, for example, someone who marries or has a child.)
To adopt either or both of these provisions, cafeteria plans must be amended by the last day of the plan year for which the change is effective (and the change can be effective as of the first day of the year). In addition, employers that want to adopt the amendments for a plan year that begins in 2014 may adopt the amendment on or before the last day of the plan year that begins in 2015.