Final Cafeteria Plan Regulations
(This Item Posted April 2001)
Prepared by: Steve Connelly
Florida Combined Life
Jacksonville, FL
The IRS has issued further final (super?, absolutely??) regulations covering permissible mid-year benefit-election changes within Section 125 cafeteria plans. The latest regulations both clarify previous status regulations, and also add one new restriction to the March 2000 listing. More importantly, they extend clarification and new examples to the March 2000 regulations’ cost or coverage provisions.
The change-in-status clarifications are effective for plan years beginning on or after January 1, 2001. However, both the new status-change restriction and the just-expanded cost or coverage provisions take effect with the first plan year beginning on or after January 1, 2002. Plan Sponsors, obviously, will need to make informed decisions about the best amendment dates for their plans.
Here are some of the key changes, presented through the ongoing professional courtesy of the Employers Council on Flexible Compensation (ECFC). Copies of the final regulations may be accessed via their web site at: http://www.ecfc.org/newregs.
Changes in Number of Eligible Dependents
Health FSA elections may now be increased or decreased to accommodate changes in the number of eligible dependents. Additionally, FSA Healthcare elections can only accommodate changes in underlying medical or dental coverage when dependent eligibility has actually changed.
Group Term Life and Disability Insurance
Participants may increase or decrease life, disability, and AD&D "dismemberment" coverage for any status change event even though eligibility under the plan may not be affected.
Relocation or Worksite Changes
Participants who move outside an applicable service area may drop coverage, even if similar coverage is available. This seems to be the only occasion when coverage may be dropped even when like coverage is immediately available.
Unfortunately, without an accompanying status change, relocated participants may not make corresponding changes in FSA healthcare elections. This applies even if the deductibles and co-payments under the newly elected coverage are higher (or lower).
Proof of Coverage Under Other Employer's Plan
Employers may now rely on the employee certifications of coverage under another plan, unless they have reason to believe that such certifications are incorrect. Naturally, employers may continue to request re-certification as frequently and in whatever form best supports prudent good-faith management of applicable benefit packages.
Judgments, Decrees, or Court Orders
For 1/1/2002 + plan years, employees may decrease elections only if a dependent actually establishes replacement coverage through the plan of a spouse, former spouse, or other appropriate individual.
Clarification Regarding Retroactive Enrollment
2001 Final Regulations clarify that HIPAA election changes (even the required special enrollment for marriage) must be prospective. This example should effectively preclude employers from allowing retroactive election changes, even for limited periods.
Permissibility of Health FSA Changes
Changes in cost or coverage rules do not apply to Healthcare FSAs, while other election change rules do.
Equally importantly, election changes are now permitted for cost increases caused by employment actions of either participating employees or their employers (plan sponsors).
Thus, participants may elect alternative coverage or drop coverage entirely if there is no similar substitute. Additionally, they may drop coverage if there is a significant cost increase and no similar coverage option is available.
Moreover, If the cost of coverage significantly decreases, non-participating employees may enroll and participants may revoke their current coverage election and elect the option that has decreased in cost during the year.
Remember, though, that underlying certificates or policies within insured plans must formally permit un-enrolled eligibles to enroll mid-year. Additionally, plan document language must allow pass-through of such change costs, to permit their pre-tax deduction under a Premium Conversion Program.
Loss or Significant Curtailment of Coverage
New examples in the regulations now explain significant increases in deductibles, increases in co-payments; and increases in the out-of-pocket cost sharing amounts.
Benefit Improvements and Election Changes
Significant improvements in benefits can now also trigger changes in benefits.
In other areas, the IRS soon intends to issue formal clarification addressing the "double dipping" created through improper application of select MR 105/106 plans.
More importantly, pending Presidential budget language offers some hope of such improvements as:
More information on those developments will be reflected in future SEBC updates.
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