pretax change in plan

[Guest andyj]

An employee signs up for a pretax medical deduction utilizing an HMO medical plan. The doctor list changes substantially and so does the hospital list. The employee wants to drop the medical coverage becuase of this. Can they drop the coverage during the plan year?

[Mary C]

Depends on what is considered substantial. For example, if your personal group of physicians drops out, you would consider that substantial, but it may only be 1% of the entire network and would therefore not really be considered substantial. Similarly, if one hospital drops, but other are available, its not substantial. Its more about how it limits access to providers and hospitals and how your plan defines adequate access. We rely on the insurance industry's definition of adequate access to decide if the change in providers is substantial enough to allow a change in pre-tax coverage.

[GBurns]

I do not see where this is a significant or even any change or reduction in coverage which is what it would need to be to be allowed under 1.125-4.

[Mary C]

Preamble to final regs 2001 Changes from the March 2000 Proposed Regulations (Under Cost and coverage rules) - "Commentators also requested clarification as to whether a cafeteria plan could allow participants to drop coverage in response to a significant change in cost or coverage of a qualified benefit. . . . . In addition, the final regulations allow a cafeteria plan, in its discretion, to treat certain other events as a loss of coverage. These events include a substantial decrease in medical care providers (such as a major hospital ceasing to be a member of a preferred network or HMO), a reduction in the benefits for a specific type of medical condition or treatment with respect to which the employee or the employee's spouse or dependent is currently in a course of treatment, or any other similar fundamental loss of coverage."

and "For purposes of these rules, a significant curtailment occurs only if there is an overall reduction in coverage provided so as to constitute reduced coverage generally (.e., a reduction in the fair market value of the coverage). Therefore, in most cases, the loss of one particular physician in a network does not constitute a significant curtailment."

In cases where provider access is significantly curtailed to make it impossible to find provider, as stated above, we allow a change to a different HMO option, but we do not allow cancellation altogether.

The actual wording of regs refer to it as "Significant curtailment without loss of coverage."

[papogi]

The IRS states in 1.125-4 that coverage changes "include a substantial decrease in medical care providers (such as a major hospital ceasing to be a member of a preferred provider network or a substantial decrease in the physicians participating in a preferred provider network or an HMO),...". It goes on to say that "the loss of one particular physician in a network does not constitute a significant curtailment". These are the guidelines you have to determine is a significant change occurred. If you decide that a significant curtailment occurred, then the employee has a right to elect "another benefit package option providing similar coverage". If no similar package exists, only then can the employee drop coverage entirely. Simialr coverage is pretty broad-based, so the employee may have to take another medical option if one is offered, and may not be able to drop coverage completely.