Cafeteria Plan Year with Different Underlying Policy Years

[EBECatty]

Is there a preferred (or possible) method to selecting a cafeteria plan's plan year where the underlying benefit components do not all run on the same period (e.g., life insurance is on a 1/1-12/31 plan year, but medical/dental are on a 7/1-6/30 plan year)? Or would you need multiple plans?

[Brian Gilmore]

You can have the different cafeteria plan components on different plan years within the same cafeteria plan.  I've copied the cite below.

Lots more to say on each issue, but short version is to try to avoid whenever possible:

1. The health FSA on a different plan year from the medical plan if they offer an HDHP.  This will cause tremendous HSA eligibility headaches.
2. The dependent care FSA on a non-calendar plan year.  Coordinating the $5,000 calendar-year limit with a non-calendar plan year is another big headache.

Prop. Treas. Reg. §1.125-5(e)(3):

(3) Separate period of coverage permitted for each qualified benefit offered through FSA. Dependent care assistance, adoption assistance, and a health FSA are each permitted to have a separate period of coverage, which may be different from the plan year of the cafeteria plan.

[Peter Gulia]

If it's not feasible to get all the years aligned, is aligning the cafeteria plan's and health flexible spending account's year with the health-coverage year more important than alignments about other benefits?

[EBECatty]

Thank you both. My immediate concern was making sure the cafeteria plan year ran on the same policy year as the group medical plan because, as far as I can tell, there is no general mid-year election change rule that would accommodate adding, dropping, switching plans, etc. (outside of significant coverage changes, cost changes, spousal coverage, etc.). 

But it sounds like aligning those (medical is a non-calendar year here) could cause other headaches as HSAs, DCAPs, and FSAs are involved as well. 

Peter, I read the regulation you cite on different years as being limited to FSA components, not pre-tax premium deductions more generally, so would not necessarily apply to different policy years for, say, medical and life insurance. Am I mistaken?

[Peter Gulia]

I only asked a question, hoping Brian Gilmore might guide us.

And about the proposed rule mentioned, I have not thought about whatever interpretation it proposes.

[EBECatty]

19 minutes ago, Peter Gulia said:

I only asked a question, hoping Brian Gilmore might guide us.

And about the proposed rule mentioned, I have not thought about whatever interpretation it proposes.

I meant the regulation Brian cited (apologies). 

[Brian Gilmore]

Yeah I see your point there.  

Employee elections are governed by the Section 125 cafeteria plan rules, which generally require an irrevocable election for a fixed 12-month period of coverage (plan year) unless the employee experiences a permitted election change event.

Not all components of the cafeteria plan need to have the same period of coverage (12-month period).  For example, the health FSA could have a different 12-month period of coverage from the dependent care FSA. 

However, each component does need to have a fixed 12-month period of coverage--and that includes the POP.  Employee elections to contribute the employee-share of the premium to the medical, dental, and vision on a pre-tax basis are all run through the POP.  Those elections need to have the same 12-month period of coverage where those elections are irrevocable unless the employee experiences a permitted election change event.  That 12-month POP period of coverage will track the plan year for the cafeteria plan.

So for medical, dental, vision, there will be one OE and one 12-month plan year for all medical elections regardless of the various policy renewal date of the underlying plan options.  If the cafeteria plan year is set at 1/1, employees need to make all their medical/dental/vision (even those with a different policy year) elections at an OE that occurs before that date, with those elections irrevocable through 12/31.

If the coverage changes mid-year or the employee-share of the premium changes mid-year on 7/1 upon the policy renewal, those could be permitted election change events for the affected employees depending on the type of change that occurs.

Here's a couple posts walking through scenarios where that might occur:

• https://www.newfront.com/blog/when-mid-year-coverage-changes-create-a-mini-oe
• https://www.newfront.com/blog/mid-year-contribution-changes-employee-share-premium-2

[EBECatty]

Thanks for sharing your expertise, Brian. Very helpful. It sounds like the moral of the story is to use the same plan year for everything where possible.