Change in Status

[Guest KarinB]

We have a client whose employee has family coverage with premiums taken out pre-tax through a cafeteria plan. The employee's spouse is now eligible for her benefits and he wants to terminate his coverage and go on hers. The employer is not allowing him to terminate his coverage since it is pretax but is allowing her to terminate off the coverage since she had a change in status. The employee is not happy with this decision and needs something in writing. The employee provided the Regs and the employee is stating it is all in their interpretation of the Regs. Any suggestions?

[J Simmons]

It might be more than just the ER's interpretation of the regs. The cafeteria plan document may circumscribe the situations that a mid-year change will be allowed incident to a change in family status tighter than what the regs permit by way of mid-year changes. So checking the plan document as well as the regs is important.

Then there is the issue of who has legal responsibility to interpret and operate the plan. That would be the plan administrator (perhaps that is the employer), and the plan document may give broad discretion to the plan administrator to do so. If so, courts will only upset the plan administrator's decision if it is found to be an abuse of discretion.

As for dealing with an unhappy employee, well that's where you need to draw on some HR expertise.

[leevena]

There are two issues here, one is the ability to disenroll from the health plan, the second is disenrolling from the Section 125 plan. Remember, these are two different plans. The health plan provides the coverage, while the 125 plan is nothing more than the vehicle by which an employee pays for the coverage.

The health plan usually does not care if someone is dropping their coverage. However, the IRS regs for 125 plan has specific guidelines that allow participants election changes mid-year for specific events occur, such as marriage, divorce, birth/adoption, death of dep, change in cost/coverage of health insurance, change in spouse employment, change in residence, etc. Additionally, these are guidelines, the employer 125 plan document is the place for you to look for the actual answer.

It does not appear that this situation meets the IRS regs for change. So the result appears to be that the employee can drop the coverage from the health plan, but still needs to have the deductions continue until the next open enrollment period. And by the way, this is nothing new. Admittedly, most people don't realize it when the enroll.

[Guest Sieve]

leevena -- I thought coverage as a spouse under another employer's health plan was a change in family statos and therefore sufficient reason for the employee in the first plan to terminate a 125 pre-tax premium election. Is that not the rule?

[Guest parrot87]

Not to speak out of turn, but Sieve is correct. The employee IS allowed to make a change in election IF the ER's POP plan document allows him to do so.

[Don Levit]

Leevena:

If the employee drops the health insurance, yet continues to make deductions:

1. Who do the deductions go to?

2. Can the employee get his deductions back at the beginning of next year?

Don Levit

[leevena]

Not to speak out of turn, but Sieve is correct. The employee IS allowed to make a change in election IF the ER's POP plan document allows him to do so.

You are not speaking out of turn, but thanks. Maybe I was not clear about it in my response, but I asked him/her to check the plan documents.

[LRDG]

If the employee drops health insurance, yet continues to make pre tax deductions because the Sec. 125 plan document does not allow election changes or because the election change is one that is not permitted under Sec. 125 regs, the funds are forfeited.

Forfeited funds, if they are FSA forfeitures or premium forfeitures, are treated no differently.

The employee can not get these forfeited deductions back at the beginning of next year or at any other time because IRS regs prohibit the return of forfeited amounts to the participant.

Forfeitures can be used to offset plan expenses, or distributed equally among all plan participants. There may be another option such as offering Sec. 125 credits with forfeited funds. Refer to the regs for a full description.