plan year-coverage period overlap

[Guest Alex Hamilton]

I'm curious to know how other practitioners handle this issue. Let's suppose you have a calendar year premium conversion cafeteria plan and one or more coverage periods for the underlying benefit plans which do not correspond to the calendar year. For example, let's say you have a coverage period of July 1-June 30 for your group health plan(s) with an open enrollment for changing elections in the preceding June. Do you have to make your cafeteria plan election to defer compensation necessary to pay health plan premiums before the beginning of the plan year (ie, in December)? If so, are you locked in to the election unless a change in status occurs when the open enrollment period arrives in the following June? It would appear that you can make your cafeteria plan plan year (and the salary deferral election)correspond with the coverage period of the underlying plan but what if you have multiple and different coverage periods. How do most employers handle this situation? In my experience coverage periods can change fairly frequently with changes in benefit programs and it seems somewhat impractical and possibly questionable from a regulatory standpoint to simply give every participant a new election opportunity at the time the benefit program changes without reviewing whether the change constitutes a legitimate change in status. Any input appreciated.

[Lisa Hand]

According to Proposed Treasury Regulations 1.125-2, Q/A-6(B)(1),"If the cost of a health plan provided by an independent, third-party provider under a cafeteria plan increase or decreases during a plan year and under the terms of the cafeteria plan, employees are required to make a corresponding change in their premium payments, the cafeteria plan may, on a reasonable and consistent basis, automatically, increase or decrease, as the case may be, all affected participant selective contributions or after-tax contributions for such health plan."

[KIP KRAUS]

Unless there is a Corporate finacial resaon for not doing so, you may want to consider having your health plan carrier(s) change your health plan year to coincide with the calendar year. They should not have a problem with this.

[Guest Alex Hamilton]

Thanks Lisa. But I still see practical problems. If you make your cafeteria deferral election before the beginning of the calendar year plan year and you have an open enrollment period later in the plan year, I dare say there are not many employers who enforce the status change rules in the middle of the year. Moreover, it doesn't seem fair to do so. If someone wants to change their election before the coverage period begins (albeit in the middle of the plan year) they should be able to do so for any reason. One way to deal with this would be for the cafeteria plan election to be made simultaneous with the coverage election under the health plan. This means that you may have cafeteria plan deferral elections spanning plan years (assuming your plan year is a calendar year). This should not be a problem although the regs talk in terms of plan years when they talk about the compensation deferral limits. See Sec 125-2, Q-A 5. In some cases the coverage period can be moved to correspond to the cafeteria plan plan year but many times that doesn't work because of costs. I am interested in knowing how this problem has been dealt with. Thanks.

[Lisa Hand]

As long as enrollment forms of for the Cafeteria Plan states that the premium amounts will be automatically adjusted should the premium cost change and it is apllied on the "reasonable and consistent basis", then there should be no practical problems. We have not seen any in our client companies. If it is a great concern or confusion then the open enrollments can be changed to coinside. As far as changes in health plans, other than during the open enrollment, most group plans only permit changes if there is a valid change of status event which usually applies as well to the Cafeteria Plan. Finally,if an employer is not applying the change of status rules to their 125 Plan, they have significantly greater problems than when their oepn enrollments for the different plans happen to be. Unless their 125 plan document specifically states they are not including the change of status rules and then there are some concerns about complying with HIPAA and FMLA.