Clarification by Treasury and IRS Relaxes Election Change Rules

So employers and employees can take advantage of the health insurance Exchanges starting January 1, 2014, regulators issued some exceptions to the permitted election changes rule for cafeteria plans.

Beginning in October 2013 individuals will have the opportunity to enroll in State Exchanges throughout the country for coverage starting January 1, 2014. These dates coincide with a large number of employers’ benefit plans who offer health insurance coverage. Their health plan years end December 31 and employees may enroll at an Exchange for the 2014 plan year. However, because of the cafeteria plan change of election rules, it would not be easy for employers who run their benefits on fiscal plan years.

When participants enroll in a cafeteria plan, even just for taking health insurance premiums pretax, the election is irrevocable unless they sustain a qualified reason to change their election. The availability of health coverage through an Exchange does not constitute a change in status. Participants in cafeteria plans that do not end on December 31 would be unable to change their salary reduction elections in the middle of their cafeteria plan year and purchase coverage through an Exchange.

In January 2013, the IRS published their latest Affordable Care Act (ACA) proposed rule entitled “Shared Responsibility for Employers Regarding Health Coverage.” This publication also included instructions for employers whose benefit plans operate on a fiscal year. To help employees who participate in fiscal cafeteria plan years, the Treasury Department and the IRS will allow a one-time transition period whereby participants may change from employer-sponsored health insurance to a State Exchange plan for applicable large employers whose benefit plans are on a plan year that does not start on January 1.

Affected large employers may, at their discretion, amend their written cafeteria plans to permit either or both of the following changes in salary reduction elections.

• An employee who elected to salary reduce through the cafeteria plan for accident and health plan coverage with a fiscal plan year beginning in 2013 is allowed to prospectively revoke or change his or her election with respect to the accident or health plan once, during the plan year, without regard to whether the employee experienced a change in status event described in the change of status regulations 1.125-4; and
• An Employee who failed to make a salary reduction election through his or her employer’s cafeteria plan, for accident and health plan coverage with a fiscal plan year beginning in 2013 before the start of the cafeteria plan year beginning in 2013, is allowed to make a prospective salary reduction election for accident and health coverage on or after the first day of the 2013 plan year of the cafeteria plan year, without regard to whether the employee experienced a change in status event described in 1.125-4.

Why is it so important to allow employees to seek coverage on the Exchange? First, ACA was written to assure that employees and individuals could purchase insurance coverage through State Exchanges. And secondly, employers want what’s best for themselves and their employees. For instance, if an employee is not enrolled in health insurance, they need to get coverage. However, employers can be penalized if one employee chooses coverage from the Exchange and receives premium credits. This is call “Shared Responsibility.” Employers would prefer to allow all their employees the opportunity to choose coverage at the same time.

Shared Responsibility for applicable large employers means they are subject to a specific “assessable payment” starting January 2, 2014 if they either:

• fail to offer full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored health plan and any full-time employee is certified as having received a premium tax credit or cost-sharing reduction; or
• offer full-time employees (and their dependents) minimum essential coverage that meets minimum value and affordability directives and one or more employees are certified as having received a premium tax credit or cost-sharing reduction.

An applicable large employer is an employer that employed an average of at least 50 full-time employees, or full-time equivalents based on hours of service, on business days during the preceding calendar year. This is welcome clarification and remediation for employers with fiscal year cafeteria plans, however it is not mandatory that employers offer this option to their employees. This proposed rule also included an expanded timeframe for adopting this one-time change in status amendment to cafeteria plans. Cafeteria plans may be amended retroactively to implement these transition rules. The retroactive amendment must be made by December 31, 2014, and can be retroactive to the date of the first day of the 2013 cafeteria plan year.

This amendment is only for accident and health coverage offered through a cafeteria fiscal year plan beginning in 2013 and does not apply to any other qualified benefits offered through the cafeteria plan, such as health flexible spending accounts. It is also temporary and only applicable to cafeteria plans that began in 2013.