Revocation of 125 Coverage

[Guest dsusan69]

Hello - Can an EE drop their Medical coverage under a 125 plan without a life changing event? My company switched insurance providers 4/1/08, the coverage we now have pays for nearly nothing at a 33% increase. I have found outside coverage for a lesser premium which will pay for the doctors and medications I need.

When I asked the HR department this was their response: (I did ask if they would reimburse the EE if no coverage was elected)

Unfortunately, we cannot reimburse you if you find coverage on your own. Since our plan is a section 125 plan, you will not be able to drop out of our plan until open enrollment next year (April 2009). You can only drop out if it’s a qualified life event (marriage/divorce, birth/adoption of child, change in job status (termination)).

I thought a voluntary deduction could be stopped at any time without reason. I tried to look up this answer in The Payroll Source however I became more confused the more I read.

Thank you for your time in answering this question.

Susan

[jlea]

When an employer adopts a Section 125 plan (which permits them to use employees' pre-tax dollars to pay for medical insurance premiums (for example)), the employer has the ability to state what types of events will permit a participating employee to make midyear election changes.

Many employers choose to make full use of the permissible midyear election changes as established by the IRS in its regulations. If your employer went this route, a participating employee could choose to make a midyear election change when there is a significant cost or coverage change. If, as you indicated, the coverage has significantly worsened and the cost significantly increased, that would permit a midyear election change to drop that coverage.

If, however, your employer did not choose to make full use of the permissible midyear election changes, it's a different situation. I would ask your HR rep for a copy of the plan document or a written explanation of what midyear election changes are permitted.

[Chaz]

Susan,

Your HR department is generally correct; elections to participate in a cafeteria plan on a pre-tax basis are generally irrevocable (i.e., can't be changed) unless certain events occur, such a life status change.

What the HR Department may be missing is that under IRS regulations, election changes may be permitted mid-plan year upon a significant increase in the cost of coverage. Your employer does NOT have to permit changes upon such an occurrence. You should ask for the plans' summary plan description to see if it is an event permitting an election change.

Also, your post kind of implies that you chose this new plan during open enrollment before April 1. Were you given materials at that time telling you what the premium was? If you elected that coverage during open enrollment you will not be able to change the election unless a qualifying event occurs during the plan year (i.e. after April 1).

[Don Levit]

It seems as if the employer is not willing to budge on this change of election.

Assuming that this is a significant change in premium, benefits, etc., and that the employee can opt out, is the employer precluded by law from providing the 125 plan for Susan's individual policy, or is it merely up to the employer's discretion to do so?

Don Levit

[J Simmons]

Assuming as jlea indicated your employer might have chosen in designing the 125 plan to make full use of the change in status rules to permit mid-year election changes, you cannot drop the 125 coverage altogher due to a cost increase or loss of coverage, even significant ones, mid-year unless there is "no other benefit package option providing similar coverage" then available. Treas Reg 1.125-4(f)(2)(ii) and (3)(ii). If the cost increase is significant or the coverage loss significant, but the new coverage offered through the 125 plan provides "similar coverage", the employee doesn't have the option to stop the election mid-year.

The plan administrator would be the one to determine if the cost increase and coverage loss were significant, and whether another, similar benefit option is yet available.

[GBurns]

My experience is that HR and Benefits usually ad lib and provide answers that are not consistent with the actual plan document.

So my advice is to look at the actual Plan Docuement to see if it allows more or allows less options than the Treasury Regulations do.

You might want to read www.changeofstatus.com which should be less confusing and also where you can read the Treas Regs that JSimmons cited.

Your original post raises some questions for me:

Did you knowingly enroll in this new plan? If so, then you were fully aware that there was an increased cost and you elected and accepted. The law is not in favor of buyer's remorse, so HR might be right.

Your employer's section 125 plan is probably not set up to reimburse you if you get outside coverage.