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"Cessation of Required Premiums"


Guest Wislndixie
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Guest Wislndixie

There used to be a Treasury Regulation that allowed an employee to terminate their election (POP) mid-year due to cessation of require premiums. This has come up with a client that has a POP with Aflac. A disgruntled employee told his payroll department that he wanted his deduction for cancer insurance stopped. They told him he couldn't cancel in midyear. Can an employee terminate in mid-year under the cessation of required premiums?

Thanks.

Wisln

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Guest Wislndixie
Only if state law exists that protect an individual employee's pay and paroll deductions, and supercedes Federal regs., requiring a qualified status change in order to cease deductions.

What if your plan document has a provision for termination of election for "cessation of premiums"?

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Maybe I am not properly understanding what you're asking about here, but it very much seems like what you are saying would make the entire 125 regs irrelevant, because anyone could at any time just say, stop my premiums and call it a cessation. In my mind, cessation would mean that the insurer no longer required them, not that someone just said to stop paying them. That would be a significant premium rate change which would qualify as a status change.

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Guest Wislndixie
Maybe I am not properly understanding what you're asking about here, but it very much seems like what you are saying would make the entire 125 regs irrelevant, because anyone could at any time just say, stop my premiums and call it a cessation. In my mind, cessation would mean that the insurer no longer required them, not that someone just said to stop paying them. That would be a significant premium rate change which would qualify as a status change.

Thanks for the reply. What the situation is, is an employee no longer wants their cancer coverage that was pre-taxed in a POP plan. He was told he couldn't cancel his coverage until open enrollment since he didn't meet any of the Qualifying Events for a mid-year election change. He got rather indignant and told the HR person that they couldn't force him to pay for coverage he no longer wanted or needed. He said it was not an election change but he considered it a "termination of coverage". He also wanted to cancel his "medical coverage" which was pre-taxed. I found an old Treas Reg 1.125-2 Q/A-6(e)(1989) that indicated coverage for an employee under a 125 plan could be terminated becasue of "cessation of required premiums". The new regs don't mention anything about this. I checked with another TPA who advised they had a couple of clients that had in the plan document that "coverage could be terminated for non-payment of required contributions".

So I guess I'm asking, how can you prevent or enforce an employee who wants to cancel coverage under a POP plan from doing so and, is it possible to incorporate into the plan document a provision that would terminate the coverage for non-payment of premiums.

Thanks,

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The date cited is 1989, probably published as a result of repeal of Sec. 89, a time when regs were chaotic. IRS and other agencies issued suprufulous notices and advisories that today are of little or no consequence. Cessation of required premiums might refer to a plan termination or some other situation at the plan level or the insurer level.

The emplyee is correct in that no one can force them to keep coverage they no longer want. Terminating coverage does not change the pre-tax deduction.

I have encountered participants wanting to drop coverage mid year without meeting IRS terms of status change. Even if coverage is dropped and the policy is no longer in effect, the pre-tax deduction remains in effect. To do otherwise puts the plan in jeopardy of IRS imposed employer sanctions, penalties and potentialy the loss of all employee taxes as well.

I have not encountered a situation where the state law has been invoked by an EE, so I have no insight to offer. But I'm confident there is no one participating in my portfolio of Sec. 125 plan clients who can claim ignorence about the irrevocable nature of Section 125 elections. I recommend to participants that they keep coverage until next open enrollment, versus the alternative and only option for the employer in this case, to continue the pre-tax deduction with no coverage in force. The employer has the choice of possible sanctions, pelalties and jeopordizing the entire plan, or the ER can deny the EE request to revoke the election and not risk violiating terms of IRS compliance.

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"So I guess I'm asking, how can you prevent or enforce an employee who wants to cancel coverage under a POP plan from doing so and, is it possible to incorporate into the plan document a provision that would terminate the coverage for non-payment of premiums."

The employer prevents cancellation of the section 125 salary reduction agreement by not amending or terminating the agreement (it is a bilateral agreement) and by not increasing the the employee's pay. Or, in terms that most people use, but is no correct for tax purposes, you continue the deduction from pay. How can the employee cause an increase in the pay check without the employer's cooperation?

As LRDG indicates, the insurance coverage is a separate matter, to some extent. The employee may be able to drop the coverage (or maybe not if it is group coverage or has terms to the contrary). If the coverage is properly dropped, no premiums will be paid on it. But the section 125 salary reduction is unaffected unless what happens with the insurance is not elective. Under the salary redution agreement, the employer agrees to provide the coverage in lieu of pay. The employer needs to understand the coverage and whether or not it can be dropped, or has been properly dropped, to make sure that the employer is meeting its obligation to provide the coverage. The possible asymmetry can be unsettling, but it can also be the correct outcome.

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Guest Wislndixie
Based on ther irrevocable election entered into by the EE, the EE and ER are bound to the agreement for the plan year, qualified status changes not withstanding.

Thanks for all the input. I'll relay this to the client.

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Guest Mr. Kite

If the employee wishes to cancel the health coverage, but the salary reductions continue, where does the money go? Does the insurance company continue to receive it?

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The salary reductions do not go anywhere. You might say they go to the employer's bank account, but that is where they start. But the discussion is academic. If an employee is not happy with the coverage and can arrange to have the coverage cancelled, but the salary reduction cannot be changed, the employee would rethink the unhappiness and keep the undesired coverage rather than lose it because the employee gains nothing by dropping the coverage.

This thread has become very confused over the difference between the insurance coverage and the cafetria plan election to reduce pay, and possible differences in the ability to stop coverage and the ability to change the pay reduction election. Each element must be considered according to the applicable terms of the respective plans and the applicable law. In most circumstances there will be no differences: the coverage cannot be dropped by choice mid-year and the pay reduction cannot be changed by choice; if coverage changes because of changed circumstances, the pay reduction can be changed in a way that is consistent. None of the posts have dealt with the whole story. Each has missing pieces, so none of the conclusions are conclusive, leading to the appearance of strange outcomes that you will not likely find in practice.

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