Retroactive Election Change

[Guest kredlin]

If a participant incurres a change in status other than a birth or adoption, can the company allow the participant to change their medical coverage election retroactively to the date the change in status occured? I know reg 1.125-4 suggests that changes in salary reductions can only be prospective in this case, but if the salary reduction is not changed retroactively and the company pays the extra cost, can the participant's coverage change retroactively?

[papogi]

The IRS rules in 125-4 are maximum standards. A 125 plan can be written with more restrictive rules (such as not allowing status changes at all, or limiting reimbursable items under an FSA, etc.), but they can't be more generous. The reason that the IRS has the no-retro rule is because it wants to guarantee that election changes are consistent with, and on account of, family status changes. Allowing election changes past the usual 30 day time period (whatever time period is spelled out in your 125 doc) opens up the IRS to interpret the change as one being made because an employee forgot to make the change when they should. Going against this rule, even when you understand the employee's frustration, can potentially set up the employer and all 125 plan participants for costly ramifications. Somewhere along the line, employees must take some responsibility for their benefits.

If your carrier will allow the change to the underlying plan (or, if you are self-funded, you are willing to make the exception, thereby setting a precedent for any similar situation in the future, and you feel you can get this by any reinsurer), then you may be able to allow them on the underlying plan through after-tax deductions until the next open enrollment. I would be very careful when it comes to your 125 plan.

[Guest tjgiles]

Another question regarding retroactive changes...

We have a quarterly lookback process in which each quarter we review the hours worked for both our FT (eligible) and PT (ineligible) employees to determine if they have maintained, lost or gained eligibility. If they have gained eligibility, they have 31 days to submit their benefits enrollment. Should the coverage be effective the first of the month (this effective date is in our plans) following the submission date of the form or the first of the month following the status change?

[papogi]

In tjgiles' instance, the cleanest way would be to have the effective date be the first of the month following submission. They have 31 days to submit following the status change, and that's right in line with what the IRS wants. In order to prevent any retro coverage (the election must be made before the coverage period begins), the pre-tax deductions could then begin the first of the month following submission.