drop coverage mid year without a status change?

[Guest Ant909]

We have a self insured Medical plan and only allow mid years changes within 31 days of a status change. Recently one of our employees wanted to drop the medical coverage because they just didn't want it anymore. As expected they were told no because they needed to have a status change in order to do so.

Well the employee found in your SPD there is a paragraph that states "an employee can drop medical insurance at anything during the year per their request"

Question: Can we allow this employee to drop coverage without a status change or does it violate IRS regulations?

Please advise, as I have looked all over the hard to understand irs.gov website and have found nothing. Thanks.

- Ant

[papogi]

There was a similar post a couple months ago that happens to have been resurrected recently. Remember that status changes typically apply to cafeteria plans/flex plans/125 plan, whatever you want to call it. In other words, the pre-tax payroll deductions that the employee might be subject to in order to help pay for the benefits. If you are talking about a plan that has pre-tax payroll deductions, then you have a 125 plan. The IRS only allows mid-year changes to 125 plan elections when an employee has a status change. The underlying health plan (that the 125 plan payroll deductions are helping to fund) may have its own set of rules as to when someone can drop the coverage. If the underlying health plan syas that an employee can drop the coverage at any time, then this employee can drop the coverage at any time. They will not, however, be able to stop the pre-tax payroll deductions without a status change (until the next open enrollment). The end result is that the employee will be paying for coverage that he/she no longer has.

[J Simmons]

I agree with papogi, to a degree. The distinction drawn is between the cafeteria plan and the health insurance coverage. The cafeteria plan is a mechanism for paying for the health insurance coverage. The cafeteria plan is distinguishable from the health insurance coverage itself. The coverage could be dropped mid-period of coverage, but the payroll reduction not.

An employee can only make a cafeteria plan change (i.e., a change in election for payroll reduction and to which benefits the reduced amount will be applied in payment) mid-"period of coverage" if there is (and then only to the extent consistent with) certain changes in status spelled out in the regulations. Regs 1.125-4, 1.125-2, Q&A-6.

Reg 1.125-1, Q&A-8 provides that a "plan may provide that elections may be made at any time" in accordance with certain guidelines (see Q&A-15) to avoid taxation due to constructive receipt. It won't be an 'election' if the employee can change it after the period of coverage has begun but before it has ended (except for a Reg 1.125-4 specified change in status mid-period of coverage). If the employee is otherwise permitted to revoke the 'election' after the period of coverage has begun but before it ends, that power of revocation is constructive receipt of the taxable income. Reg 1.125-1, Q&A-15. So to be valid, the election must be made before the period of coverage begins and the election must be irrevocable once the period of coverage begins (but for a Reg 1.125-4 specified change in status mid-period of coverage).

The cafeteria plan might be designed with periods of coverage shorter than 12 months for the self-insured health coverage and other benefits except for health flex accounts. It should not be assumed that the periods of coverage must be 12 month periods when designing a plan. Granted, the 'period of coverage' for a health flex account must generally be a 12-month period. Reg 1.125-2, Q&A-7(b)(3). For any and all other permissible benefits, the regs don't specify. Thus the plan can be drafted to specify different 'periods of coverage' for benefits other than a health flex account.

If the plan specifies that the self-insured health coverage is for 'periods of coverage' of for example a month each, then the election form can be made to evergreen the election into successive months until the employee stops it. If an employee stops or changes the election, that would take effect at the beginning of the next month after so stopping or changing the election. This would increase administrative tasks and burden on payroll. But it would also give some flexibility to the self-insured health coverage benefit that most cafeteria plans simply don't permit, but could.

If you have a premium only plan (POP), this latitude can be particularly useful without engendering additional confusion among employees.

The cafeteria plan may also allow for different periods of coverage for day care flex accounts than the typical 12-month period so many plans use. One plan I've reviewed used Jan-May, June-August, Sept-Dec as periods for day care flex, reasoning that this reflected differences when children may be in school or on summer break, and when the other spouse may be attending college for a semester at a time.