Negative Election

[Guest LGoalen]

I realize this is one of those "gray area" in the realm of cafeteria plans but a client brought a cafeteria plan to me with a interesting default option. The client has been using this option for several years but now there has been a problem with an employee who forgot to make a new election during the open enrollment period. The plan has medical benefits designated as mandatory core coverage and each employee is given an employer allowance.

This plan, instead of simply using the evergreen election approach and rolling over the prior year's election, considers the participant to have selected the default provision. The default provision is the lowest cost employee-only health coverage. Here's the catch... the failure to re-elect causes the participant to forefeit his employer allowance and the cost of the default option is paid by salary reduction.

Has everyone ever seen a penalty provision like this in a 125 plan?