Election to change health premium mid year under a cafeteria plan that is a calendar year

[taxllm]

We have a cafeteria plan, which is a calendar year, and an underlying health plan, which is a fiscal year. The employer allows health FSA and DCAP elections in December and election for the health premium in July when there is an open enrollment period for the health plan. Does the employer have to allow employees to make an election for the health premium in December, before the start of the cafeteria plan, or is the July election enough? Is the mid-year election allowed under 1.125-4(f)(4)(ii) change in coverage under another employer plan?

[J Simmons]

I don't think your mid-year election is allowed unless for each mid-year, the increase in premiums is significant and the choice for employees is between continuing what they had at the higher premium or opting instead for similar coverage.

I also think you need to give the plan-eligible employees a December election as to the health insurance premiums as well as the flex accounts for the upcoming calendar plan year.

[taxllm]

In July the employees can elect between a non HDHP and an HDHP with an HSA. The employees are allowed every December to change their elections for DCAP and health FSA. When would the 1.125-4(f)(4)(ii) apply?

1.125-4(f)(4)(ii) The cafeteria plan permits participants to make an election for a period of coverage that is different from the period of coverage under the other caferia plan or qualified benefits plan. Qualified benefits plan can be a health plan.

Thanks

[J Simmons]

What would be change that "is on account of and corresponds" with the mid-year prospective election? It needs to be a change in coverage, per the title and first clause of Prop Treas Reg §1.125-4(f)(4), not merely one group policy year coming to an end and another one beginning. I don't think you can hang your hat on just Prop Treas Reg §1.125-4(f)(4)(ii) without that introductory clause (and title).

[taxllm]

"Change in coverage" would be changing from the non-HDHP to the HDHP with the HSA. I agree that having the mid-year election only because the policy renews is not enough. If for example the employee keeps the same non HDHP policy the mid-year election would be allowed only if it fits under other 1.125-4 events, such as 1.125-4(f)(2) cost changes. If there is automatic change and the plan document provides for it or the cost increase is significant.

Thanks a lot for the feedback, it helps clear some of my confusion on the 1.125-4(f)(4)(ii) reg.

[J Simmons]

I agree that if the plan's only health coverage offering is one time changing from non HDHP coverage to an HDHP coverage with an HSA mid-plan year you have a change in coverage that permits a mid-PY election. Also a mid-PY election if you only had one but then added the second in the middle of a PY.

However, if the plan has offered and continues to offer both a non HDHP coverage and an HDHP coverage with an HSA, from which the employees choose, employees need to make that choice before the beginning of the PY.

[CEB]

Several ERISA attorneys have told me over the years that the IRS only allows changes to an FSA midyear if there is a "change in status" for the family. If a family member has a child they can add money, if there child graduates, they can decrease their FSA. Other types of health and welfare plans (other than FSA) could have an open enrollment if there are major changes to the plan that impact the members expenses. Many employers have FSA on a calendar year and have a different health plan year. I would recommend for your client to have open enrollment for the plan at the normal time in July or whatever plan year, but for their benefits to run on a calendar year (such as deductible/OOP) start over in January. That way things are a little more in balance.

[J Simmons]

Several ERISA attorneys have told me over the years that the IRS only allows changes to an FSA midyear if there is a "change in status" for the family. If a family member has a child they can add money, if there child graduates, they can decrease their FSA.

I have understood the change in status regs to permit an increase mid-year in a health flex account when the employee gets married or gains a new dependent mid year "to fund coverage for" that new person (Treas Reg § 1.125-4©(4), Example 1. (iii)), but not that the mid-year loss of a spouse or dependent allows for a mid-year decrease by the employee in a health flex account.

[Guest nybenefits]

We have a cafeteria plan, which is a calendar year, and an underlying health plan, which is a fiscal year. The employer allows health FSA and DCAP elections in December and election for the health premium in July when there is an open enrollment period for the health plan. Does the employer have to allow employees to make an election for the health premium in December, before the start of the cafeteria plan, or is the July election enough? Is the mid-year election allowed under 1.125-4(f)(4)(ii) change in coverage under another employer plan?