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Mid-year health insurance cancellation


Guest HoosierHR
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Guest HoosierHR

My new employer allows employees to drop medical and/or dental insurance (pre-tax deductions) at any time during the year without a reason. The plan is "closed enrollment" however, so the employee can never come back on unless they've lost coverage elsewhere (presumably under a spouse's plan).

My concern is the cancellation clause is a violation of Section 125. I've been in HR for quite some time, specifically benefits, and have never seen this.

Any comments from 125 experts?

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Guest HoosierHR

I don't see anything wrong with the policy as long as the pre-tax deductions continue. The Section 125 rules apply to the deduction and favorable tax treatment.

That's the problem - the deductions cease as well as the policy.

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Guest HoosierHR

I made what I thought was a snarky comment intimating that it would be usual for an employee to elect to drop coverage but still have to pay for it. Absent very peculiar circumstances, why would anyone do that?

Nobody would "want" to do that, but if you are following Section 125 that would be the only available option of a mid-year change (sure, employee can cancel medical insurance if carrier allows it, but they have contracted with employer to have pre-tax deductions taken out for the entire year, unless they have a qualifying event).

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google found this well written summary:

http://www.mbwcpa.com/category/80/Tax_Benefits_of_Section_125_Cafeteria_Plans.htm

which includes that deferred comp cannot be a benefit option, and impermissible benefits put plan qualification at risk.

So if the insurance can be cancelled and the payments continue (which they must without a qualifying event), what is the qualified benefit the employee receives for these payments to nowhere?

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I made what I thought was a snarky comment intimating that it would be usual for an employee to elect to drop coverage but still have to pay for it. Absent very peculiar circumstances, why would anyone do that?

Nobody would "want" to do that, but if you are following Section 125 that would be the only available option of a mid-year change (sure, employee can cancel medical insurance if carrier allows it, but they have contracted with employer to have pre-tax deductions taken out for the entire year, unless they have a qualifying event).

Hoosier is correct. As for why would someone do that, don't know. My best guess is that the employee and the HR department was unaware of this requirement. An employee cancels the medical/dental, the HR cancels the deductions and now is technically in violation of Section 125. Unless the Section 125 police are notified...

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My best guess is that the employee and the HR department was unaware of this requirement.

I think you hit the nail on the head, leevena.

Looks like HR needs to explain 125 to the employer and at a minimum fix the procedure.

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Some employers confuse what the insurance provider permits and what Section 125 permits. I would bet that a current or former insurer had the rule about dropping now but waiting to rejoin so that's what the employer adopted.

Kurt Vonnegut: 'To be is to do'-Socrates 'To do is to be'-Jean-Paul Sartre 'Do be do be do'-Frank Sinatra

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  • 1 month later...
Guest morris

Although EXTREMELY rare, I have seen employees cancel their insurance mid year knowing that their pre-tax deduction for it will continue until the next qualifying event or end of the plan year. The several times I've seen it (in 25 years)was when the employee had dual coverage, and lousy co-ordination of benefits was driving them (and their providers) crazy. The perceived benefit is peace of mind.

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