Expanded Mid-Year Election Changes Relieve Lock-Out Issues
Since the implementation of Health Care Reform, certain employees and employers have been facing the problem of election lock in their cafeteria plans. In an employer-sponsored non-calendar year health plan, an employee’s election is irrevocable during the plan year if the premiums are paid through a cafeteria plan (which virtually all are), unless it falls within certain enumerated circumstances.
Enrolling in a plan through the exchange was not one of them. If the employer’s open enrollment did not match up with the exchange’s open enrollment period, the employee was essentially locked out of enrolling on the exchange since he or she could not revoke elections in the employer plan mid-year. The only options were to: (1) have a period of coverage lapse between the end of the employer’s plan year, and January 1st, or (2) a period of overlapping coverage.
Beginning in 2015, a similar issue would have occurred when an employee experienced a reduction in hours. If the employer planned to use the look-back method for purposes of the pay or play mandates, an employee’s reduction in hours would not render the employee ineligible for the employer’s plan due to the stability period. Since the employee wouldn’t have had a loss of coverage, the employee wouldn’t have been able to make a mid-year change even though due to dwindling hours and less pay, continued participation could become a financial burden for the employee.
On September 18th, the IRS issued Notice 2014-55 addressing the above situations. The guidance is intended to alleviate the lock-out problem by creating two additional permitted election changes for coverage under the cafeteria plan regulations. The Notice expands permissible mid-year election changes and states that a participant may revoke an election for employer-provided health coverage in two conditions, provided certain conditions are met:
- Revocation due to a reduction in hours. Where the employee’s regular working hours are reduced to less than 30 hours a week during the plan year, but for whom the reduction does not affect the employee’s eligibility for employer’s group health plan; and
- Revocation due to enrollment in the exchange. Where the participant is able to enroll in a qualified health plan through the exchange and desires to do so and cease coverage under an employer’s group health plan.
In both situations, the employer may rely on an employee’s reasonable representation that he or she is expected to average less than 30 hours a week and intends to enroll in other coverage, or intends to enroll in a qualified health plan through the exchange.
This is welcome guidance to many employers. It provides more flexibility for the employee, while protecting employers from the pay or play penalty. These additional mid-year election changes are optional for employers, not required. However, if the employer decides to allow for the expanded mid-year election changes, the plan document must be amended. The amendment must be adopted on or before the last day of the plan year in which the elections are allowed, but may be applied retroactively to the first day of the plan year, provided participants are notified of the amendment and the plan is administered in accordance with the guidance. However, if an employer wishes to allow the new election changes for 2014, the employer has until the last day of the plan year that begins in 2015 to amend the plan.