Increasing a participant's share of premium costs mid-year

[KJohnson]

An employer has a fully insured health plan funded through a 125 plan. The employer wants to increase the participant's share of the premiums mid-year although there has been no premium increase by the insurer.

The prior proposed 125 regs seem to state that the only time you can "automatically" increase salary reductions or allow the employee to elect out of coverage mid-year is when the insurer increase the rate. Is this an accurate view?

Do you think the new proposed regs change this rule for fully insured plans?

If not, is there a way to accomplish the employer's goal such as eliminating the "old" health insurance and offer new insurance with the participant picking up a larger share of the premiums?

[SLuskin]

I think that as long as the plan document has been amended to include all of the final and proposed regs, that the employer can do this. If the employer can give a "premium holiday" then it can also add to the cost that the employees pay.

[KJohnson]

The new propsed reg seems to indicate that in order for an employee to revoke his election or in order for the election to automatically increase, the "cost of the qualified benefits plan" must increase (or signficiantly increase in the case of revoking an election). I am just not sure that this captures an employer who simply wants participants to pay more of a health care cost that has not changed.

On the other hand, couldn't the employer just require the employee to pay a greater portion post-tax outside of the 125 Plan?

[KIP KRAUS]

Just thinking out loud here, but if employees have no say in what they are paying for their benefits to begin with wouldn't it seem that if an employer forced an increase in premiums upon them that they could have an increase in cost allowed under Section 125?

[KJohnson]

It does not look like the old 1.125-2 Q&A 6(B)(1) has been deleted by the new proposed reg. The old 125 Q&A column on BenefitsBoard had this interpretation of that reg:

-----------------------------------------------------------

(Posted February 15, 1999)

Question 142: Due to financial hardship, an employer is going to have to ask its employees to increase their share of the medical insurance premiums mid-year. Is this allowable, since the employer has a Section 125 plan in existence?

Answer: I'm afraid this might be problematic, unless an independent third-party carrier raised the cost of premiums in the middle of the plan year. See the following excerpt from Proposed Regulations 1.125-2 Q&A 6 (B)(1).

"Significant cost or coverage changes--(1) Cost changes. If the cost of a health plan provided by an independent, third-party provider under a cafeteria plan increases 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 participants’ elective contributions or after-tax employee contributions for such health plan.

Alternatively, if the premium amount significantly increases, a cafeteria plan may permit participants either to make a corresponding change in their premium payments or to revoke their elections and, in lieu thereof, to receive on a prospective basis, coverage under another health plan with similar coverage. No elective adjustments of participants' contributions or revocations of participants' elections other than those provided for in the preceding sentence may be permitted under a cafeteria plan on account of changes in the cost of a health plan."

---------------------------------------------------------

Copyright 2000 R. C. Morris, Incorporated

___________________________________________________________

It appears that the new section (f)(2) to Q&A 6 simply supplements but does not replace the old b(1). This new section provides:

2) Cost changes -- (i) Automatic changes. If the cost of a qualified benefits plan increases (or decreases) during a period of coverage and, under the terms of the plan, employees are required to make a corresponding change in their payments, the cafeteria plan may, on a reasonable and consistent basis, automatically make a prospective increase (or decrease) in affected employees' elective contributions for the plan.

(ii) Significant cost increases. If the cost of a benefit package option (as defined in paragraph (i)(2) of this section) significantly increases during a period of coverage, the cafeteria plan may permit employees either to make a corresponding prospective increase in their payments, or to revoke their elections and, in lieu thereof, to receive on a prospective basis coverage under another benefit package option providing similar coverage. For example, if the cost of an indemnity option under an accident or health plan significantly increases during a period of coverage, employees who are covered by the indemnity option may make a corresponding prospective increase in their payments or may instead elect to revoke their election for the indemnity option and, in lieu thereof, elect coverage under an HMO option.

My trouble is that this seems to talk about the "cost of a beneft package option" rather than the allocation of this cost between the employer and participant. Also the new reg does not delete the old (B)(1).

[KJohnson]

Any other thoughts?

[Guest carsca]

One more time:

Any thoughts?

[papogi]

1.125-4(f)(2) goes on to say in (iii) that “a cost increase or decrease refers to an increase or decrease in the amount of the elective contributions under the cafeteria plan, whether that increase or decrease results from an action taken by the employee (such as switching between full-time and part-time status) or from an action taken by an employer (such as reducing the amount of employer contributions for a class of employees)." My thinking is that this would fall under an action taken by an employer. Not the best way to do things, since open enrollment would be best, but apparently not illegal.

[KJohnson]

papogi is right. My original post was based on the March 2000 proposed regulations. When the regulations were finalized in January 2001 they added the language quoted by papogi to resolve this issue.