Waiving health coverage

[Guest vkuenzler]

I am being told by an administrator of a health plan that an employee cannot "drop" their health coverage at any time. It must be done during open enrollment. If an employee participates in a voluntary health plan with employee contributions, can they waive out at any time?

[papogi]

You have at least one plan document to consult. If the payroll deductions for the employee are pre-tax, you will have two documents to consult. First, if there are pre-tax deductions, then a Section 125 flex plan is in place. The IRS is pretty clear about what constitutes a status change and would allow someone to drop coverage mid-year. Allowing a mid-year drop outside the 125 rules could result in your plan losing its qualified status, opening a can of worms. If this person has not gone through one of these status changes, they are locked into their coverage until open enrollment, if you have one. If the deductions are post-tax, or are completely employer-paid (based on your post, yours are not), then you only need to look to the plan doc of your underlying plan to see if employees can drop coverage mid-year at any time. Most underlying plans allow this, although some don't. Dropping coverage is easier than adding coverage. It's the rules attached to Cafeteria Plans that usually lock people into coverage. That's the price they pay for the pre-tax benefit.

[Guest vkuenzler]

The employee in question wanted to "drop" her coverage because her spouse has enrolled her under his plan. However, 30 days has passed since she was enrolled under spouse's plan. Does that make a difference? Are there time limits on status changes? How can you make someone stay on a voluntary health plan(pre-tax dollars) when they don't want to participate.

[papogi]

There are time limits to status changes, but they should be specified in your Section 125/Flex plan doc or SPD. They are typically 30 days, and usually no more than 60 days. According to the IRS, flex plan changes need to be "on account of and correspond with" the status change. They would frown upon an employee getting married, for instance, then only trying to add the spouse 5 months later. This would stand out as an obvious possibility of adverse selection (the employee's only now adding the spouse because now the spouse needs some treatment). Also, status changes such as marriage become effective under the 125 plan on the date the change form is filled out. Allowing such a change so long after the qualifying event means that the employee has avoided payroll deductions up until he/she actually needs the coverage. This is why a specified time frame is important.

The fact that the coverage is paid for by pre-tax dollars makes the plan subject to Section 125 rules concerning any mid-year changes to elections. Allowing a drop of coverage outside the 125 rules sets up the plan to potentially be declared out of compliance by the IRS. Not only are there penalties attached to this, but all employees under the plan could be then in constructive receipt of all benefits that were otherwise available in cash. This would mean that all pre-tax deductions for all employees would have to be taxed in arrears, and the employer would be required to pay FICA and unemployment tax on the entire pre-taxed amount.

Does the IRS enforce this? Mostly no, for obvious reasons. But, they can, and do on occasion.

[mbozek]

Ther is no clear cut answer. Most states have laws which require employee consent for deductions from pay and allow employees to cancel payments at any time. While ERISA preempts state laws relating to employee benefit plans there is a question as to whether a cafeteria plan under IRC 125 is an ERISA plan if it only allows for salary reduction of benefits which are provided under other plans. Some plans provide separate authorization for employee contributions under the contract - other are vague and only provide for remittance of contributions by the employer. Reqiring employee contributions under a provision of a contract of a benefit plan subject to ERISA would arguably be exempt from state labor law requirements that permit termination of employee contributions but you should consult counsel. An insurance contract will be subject to state insurance law.