Cost Changes

[Guest lschaab]

If a spouse's employer of an employee enrolled in a 125 Plan (opting out of medical) imposes a plan design change eff. 3/1/04 and also imposes additional contributions of its employees, can the employees spouse drop coverage and enroll in the employee Plan? What if the spouses employer does not implement the cost increases until a later date? Are there two qualifying events (1) the plan design change - curtailment and (2) cost change? Is it of any importance if the spouses employer has a 125 Plan?

[papogi]

This is addressed in 125-4 (f)(4). The other plan does not have to operate under Section 125. The regs say that a 125 plan may permit a change on account of a change made under another employer’s plan. You are correct that you have two status changes happening here. If either the curtailment of coverage or the raising of employee cost share allows employees to drop coverage under the other employer, then this change will allow the employee and spouse to begin coverage under your plan. That is, if your plan (both the underlying health plan as well as the 125 plan for pre-tax deductions) allows someone on the plan due to this type of loss of other coverage. HIPAA Special Enrollment rules do not provide protection here.

[Guest lschaab]

If we use a 30 day rule for making changes, and the payroll deduction "increase" imposed by the spouses employer did not take effect until the 5/14/04 payroll, do you think it is safe to say the spouse can drop coverage prospectively as of 5/31/04 and enroll in the employee's plan 6/1 (provided insurance contracts and the Plan permit)?

[papogi]

Makes sense.

[Guest Cgross]

Just to be sure I understand, Papogi:

If the plan document allows, an employee can drop coverage under a section 125 plan if there is a substantial increase in cost?

[papogi]

Based on the original post, we know that the employee is currently an opt-out under a 125 plan. The spouse is under an employer’s plan with family coverage, but we don’t know for certain that this spouse has a 125 plan. As to whether or not the spouse has a 125 plan, it really doesn’t matter in the issue in the original post. As long as the spouse’s employer’s plan allows employees to drop coverage due to the cost increase or the curtailment in coverage, then 125-4 allows the employee to pick up coverage for him/herself along with the spouse (again, assuming the employer’s 125 has adopted these rules under 125-4, which they are not required to do).

To your question, specifically, if the spouse is under a 125 plan and is hit with a substantial increase in cost, 125-4 says that the employee (the spouse, in this case) can revoke the current election and select a new benefit option package or drop coverage if no other benefit package option is available offering similar coverage. If there is no other option even offered by the employer, then this is easier. The example the IRS uses is someone going from an indemnity plan to an HMO option. That’s a no-brainer since the payroll deductions for an HMO will almost surely be less than those for an indemnity plan. I think that the point of the legislation is to allow people to move to a lower cost alternative, and if there isn’t anything lower cost, to allow coverage to be dropped. Although it’s too much to expect from the IRS, a better example would have been someone in a PPO option, with a cost increase being implemented for the employer’s PPO option and HMO option. If the employee moves to the “lower” cost HMO option, the new HMO costs might still be higher than the “old” PPO costs. Now there is no lower cost option (even though there technically is another option), so the employee should be allowed to drop coverage, in my view. I’m reading between the lines, however.

[Guest Cgross]

Thank you so much. I appreciate the response.

Have a good weekend!