One-Way Status Change?

[Guest kjk]

Under the new status change rules, can a plan limit the mid-year election change allowed to only permit dropping coverage and NOT adding a dependent? We have a client who would like to do just that because they happen to have a very generous benefits package--consequently, spouse's of participants who have a different open enrollment period through another employer have been known to drop coverage under their plan and pick up coverage under our client's plan. The client would like to limit this (although we realize that it is simply delaying the inevitable because the dependent can be added later, during open enrollment) by allowing a mid-year election change ONLY to drop coverage and NOT to add coverage. Any thoughts? Thanks.

[papogi]

Mid-year status changes are not required under Section 125. While most employers adopt them to their fullest, an employer can limit them. Employers cannot be more generous than the rules in 125, but they can be tighter.

[Guest kjk]

Thanks for the reply. Do you happen to have any cites/authority for that? I know the rules are permissive, the Regs state as much. Do you know of any guidance stating that employers can pick and choose what they want?

[papogi]

1.125-4 (a) states that "a cafeteria plan may (the IRS uses the word MAY all over the place to reiterate that it is at the plan's discretion) permit an employee to revoke an election during a period of coverage..." It continues in the same paragraph, "Section 125 does not require a cafeteria plan to permit any of these changes." Further, this is something from a Thompson's publication (I know it's not the IRS, but it shows I am not alone in my opinion), "Plan sponsors should note that while the regulations permit mid-year election changes, the rules do not require plans to allow mid-year election changes. Plan sponsors should consider carefully the implications of allowing various types of mid-year election changes and the circumstances under which those changes will be permitted."

[papogi]

One other complication, if your underlying plan allows a spouse to come onto your plan because the spouse dropped coverage at his/her employer, then you will have to allow the spouse onto the plan regardless of your 125 rules. If your 125 do not allow the change, then any additional payroll deductions for the spouse will need to be taken post-tax. The spouse may be able to come on the health plan, but not the 125 plan.

[maverick]

Papogi has a good point. One way around this situation (where the other spouse voluntarily drops coverage coverage to get on the employee's plan) is write the plan to limit spouse adds to losing coverage (termination, employer drops health insurance, etc.). That way people can't "shop" for the best deal on group coverage.

Maverick.

[Guest kjk]

The HIPAA special enrollment rules would require that a plan permit a spouse who loses coverage to be added, wouldn't it?

[papogi]

For individuals who originally opted-out due to other coverage (the spouse), HIPAA only requires that you add the spouse outside open enrollment if they have exhausted their COBRA rights, or, if the coverage is not COBRA, if the spouse becomes ineligible for coverage or the spouse's employer ceases contributing to the plan. A spouse dropping coverage voluntarily at open enrollment is not a HIPAA event. HIPAA gives the bare minimum. Your plan may be written such that a drop at open enrollment is a loss of coverage, but HIPAA won't help.

[Mary C]

The new (3/23/00) proposed regs specifically address the problem of different open enrollment dates. They permit an employee to make an election change in the event that a spouse or dependent makes an election change during the open enrollment period of the spouse's or dependent's employer even if it does not coincide with the employee's open enrollment period if the change is on account of and consistent with the change made under the other employer's plan.

[papogi]

The new regs only indicate what is allowable under a 125 plan that would not compromise the qualified status of the 125 plan. They do not supercede HIPAA rules, or the rules of an underlying plan. HIPAA does not require that a plan allow a spouse onto the underlying health plan of an employee if the spouse voluntarily drops coverage at open enrollment. If a plan is more generous and does allow this in its plan doc, however, the new 125 regs say that a corresponding change to pre-tax payroll deductions can be made to accomodate any increased payroll deductions associated with the spouse. Section 125 regs do not specify how an underlying health plan operates with respect to eligibility, and do not, as 125 rules say, "attempt to reinterpret HIPAA."