Rev. Rule 2002-27

[Linda]

Let’s say an employer has a 125 plan and employees pay part of the cost of GHP coverage on a pre-tax basis. But, only employees who certify that they have other GHP coverage can waive coverage under the employer’s GHP.

Along comes new Rev. Rule 2002-27: Does this Revenue Ruling say that those employees who don’t have other coverage and MUST stay in the employer’s health plan are actually making “mandatory” contributions NOT SUBJECT TO 125? If so (i.e., if the contributions are not subject to 125), how are the contributions made on a pre-tax basis? And (since most of the employees who don't have other coverage won't even ask about waiving the employer's coverage) how would an employer know who does and who does not have other coverage?

[papogi]

Assume an employer has an employee-only default election, and the employee can only opt-out of coverage if they can provide written proof that they have coverage elsewhere. If the employee wants to opt-out, but cannot prove he/she has coverage elsewhere, that employee's payroll deductions will be taken post-tax. Since the option to receive cash is removed in this case, Section 125 protection does not apply. If the employee has a family and elects family coverage, then he/she is actually making an election and is not taking the "default" election, so Section 125 protection would apply in this case. I know I'm just restating some things from the ruling, but I think it makes more sense.

[papogi]

To take this further (I have more thoughts now), I noticed that you mentioned no "default" election in your case. The company will need to decide on the most basic level of coverage (i.e., cheapest), and any individuals with this election who actually wated to opt-out but had no other insurance will need to have their deduction taken post-tax. Also, the company will only need certifications of other coverage for those employees wanting to opt-out. This does not need to be done (and isn't in the IRS' example in 2002-27) for the entire employee population. Individuals in what constitutes the "default" election, but who have legitimately elected the option, will have their deductions taken pre-tax. This means that you could have one employee with no other coverage elect the default plan because he knows he'll be forced there if he tries to opt-out. His deductions would be pre-tax. Another employee could try to opt-out, not be able to prove other insurance, then be forced to take the default plan and have deductions taken post-tax. I don't think this disparity is what the IRS intended, although I'm sure the interpretation is correct (until we get yet another bulletin updating this).

[SLuskin]

What kind of waivers would you use? The ruling seems to indicate that a fairly elaborate waiver would have to be made available to all employees upon initial eligibility and again on renewal. I was thinking that it is no more trouble to have the employees make a positive initial election, with rolling elections thereafter, than to go through some of these girations.

[papogi]

Situations (1) and (2) of the ruling operate under the assumption that elections from one year carry over to the next, unless they are changed. Only new hires, and the entire employee population for the first year of automatic enrollment, will be put into the default plan unless they make a specific election. The ruling doesn't say that some waiver needs to be filled out each year by all employees. Only those people trying to opt-out will need to provide proof of other insurance. Your suggestion of rolling elections is the way to go, and this ruling doesn't go against that. In fact, Situation (1) supports this and affirms that the IRS has no problems with pre-tax payroll deductions under those circumstances. The ruling is really there to give instruction for the relatively few companies out there who have a mandatory, basic employee-only plan and that only allow employees to opt-out if they can prove other coverage. It's the question of pre-tax versus post-tax payroll deductions for someone that effectively doesn't have a choice between benefits and cash that the ruling is trying to shed light on.

[SLuskin]

I was getting my info about the waiver from the Benefits Link to the Revenue Ruling. The 3rd paragraph in the FACTS sections says. "At the time an employee is hired, the employee receives a notice explaining the automatic enrollment process and the employee's right to decline coverage and have no salary reduction. The notice includes the salary reduction amounts for employee only coverage and family coverage, information on the time by which an election must be made, and the period for which an election will be effective. The notice is also given to each current employee before the beginning of each subsequent plan year, except that the notice for a current employee includes a description of the employee's current coverage, if any."

[papogi]

Those notices aren't "waivers" per se, but maybe we're just talking about semantics here. The notices that the IRS speaks of in 2002-27 are required in this case because they are describing a plan in which new hires, and all employees in the first year that auto enrollment is effective, are automatically enrolled in a default plan unless they make another election. Ongoing, they tell existing employees what they currently have, if anything, and tell them briefly what benefits are available from their employer, at what costs, and that they have a right to opt-out. You don't really have to provide the annual notices to ongoing employees as long as they understand that their elections stand until they make a change. They are very useful, however, in communicating changes from year to year, and for reminding employees how much their employer pays for (any employer-paid STD, employer contributions to benefits, etc.). FSA's will require annual election, however, so many employers find it easier to just open the door for any other changes, even though most people will keep last year's election.