New Optional Section 125 Midyear Qualifying Events Released by IRS
On Sept. 18, 2014, the IRS published Notice 2014-55, which creates two new Section 125 midyear qualifying events. The two new events apply in very specific situations and – like all Section 125 events – are optional. Employers who wish to include these new Section 125 qualifying events as options in their plan design need to amend the plan document accordingly. These events will be especially relevant for employers sponsoring non-calendar-year plans and those utilizing look-back measurement periods for variable and seasonal workforces.
The first new event is known as “Revocation Due to Reduction in Hours of Service,” and it applies when an employee is expected to average less than 30 hours of service per week due to a reduction in hours, yet eligibility for coverage under the employer’s group health plan is not affected. In this case, the employee may revoke their election even if they continue to be eligible for group health coverage (such as when a look-back measurement period is being utilized), and enroll in another plan that provides minimum essential coverage (MEC). For this event, employers may rely on a representation from the employee that they have enrolled or intend to enroll in new coverage. The employee does not actually have to provide proof of enrollment to drop coverage.
Previously there was no qualifying event unless eligibility for coverage under the plan was affected, and there was no specific hour requirement for triggering this qualifying event — it all depended on whether the plan document included an hours requirement for eligibility. This new qualifying event allows the employee to revoke coverage for themselves and their covered beneficiaries and enroll in another plan – even a plan offered by the same employer – as long as the plan they are enrolling in provides MEC and the new coverage is effective no later than the first day of the second month following the date coverage was revoked. This new qualifying event may be especially useful for employers who offer MEC coverage to part-time employees (those working fewer than 30 hours of service a week), even if that coverage is not affordable and does not meet minimum value. In this case, an employee whose hours drop below 30 hours of service per week may choose to revoke coverage in the minimum value affordable coverage and voluntarily move to the MEC coverage offered by that employer (or available elsewhere).
The second new qualifying event is known as “Revocation Due to Enrollment in a Qualified Health Plan,” and it applies when an employee has experienced a midyear special enrollment event such as marriage, birth or adoption, making them eligible to enroll in a qualified health plan (QHP) available in a state health insurance exchange. It also applies during the exchange’s annual open enrollment period, which may be especially useful to employers sponsoring non-calendar-year plans. Under this qualifying event, the employee may revoke their election under the group health coverage as long as they enroll, or intend to enroll, in a QHP. Again, employers may rely on a representation from the employee. The employee does not actually have to provide proof of enrollment to drop coverage.
Previously there was no qualifying event allowing a Section 125 plan to recognize special enrollment periods in a QHP offered through the exchange, nor could an employee enroll in a QHP during the exchange open enrollment and drop coverage through an employer-sponsored plan if that employer sponsored a non-calendar-year plan. This resulted in periods of duplicate coverage or a period of no coverage when 1) employees experienced special enrollment periods and enrolled in exchange coverage midyear, as they were unable to drop employer-sponsored coverage being paid for on a pretax basis, or 2) employees participating in non-calendar-year plans were perpetually “locked” into their employer-sponsored coverage, since the exchange does not recognize an employer’s non-calendar-year open enrollment as a special enrollment period, allowing midyear enrollment in the exchange. This new qualifying event resolves this issue by allowing employees to revoke coverage for themselves and their covered beneficiaries in order to obtain coverage through the exchange following a special enrollment opportunity or during the exchange’s annual open enrollment period. Coverage provided under the QHP must be effective no later than the day immediately following the day original coverage was revoked.
Each of these events allows employees to revoke coverage midyear under an employer’s group health plan, but does not allow employees to revoke their health flexible spending account (health FSA) elections. Further, these events only apply when an employee is paying for coverage on a pretax basis. While the notice may be relied upon immediately, employers wishing to allow these two permitted election changes must amend their cafeteria plans to include them. The IRS is allowing employers to retroactively amend their plans to the first day of the plan year, as long as the amendment is adopted on or before the last day of the plan year in which the elections are allowed. Further, plan years beginning in 2014 may be amended any time on or before the last day of the plan year that begins in 2015. However, in no event should an employee’s request to revoke coverage retroactively be allowed.