125 plan election changes past open period and/or first of the year

[Guest bryanb]

Is there any latitude under IRC regs for employees of a state governmental plan to change the election amount for their IRC 125 MRA election after the open enrollment period and/or after the first fo the year - eg., reason being an increase in HMO premiums for the new year?"

[Carol V. Calhoun]

Prop. Treas. Reg. § 1.125-4(f)(2) permits a premium conversion section 125 plan to make adjustments under such circumstances in one of two ways. The plan can be set up so that the salary reduction agreements under the premium conversion plan are automatically adjusted to take into account the increase or decrease or cost. Alternatively, if the cost significantly increases, the employer can permit employees to make a choice either to have their salaries reduced by the new premium amount, or to revoke their elections and, in lieu thereof, to receive on a prospective basis coverage under another benefit package option providing similar coverage.

The proposed regulations state, however, that these options are not available under a health FSA, but only under a premium conversion option. Thus, it is important to keep the premium conversion feature as a separate election, not as part of a general health FSA, if this option is to exist.