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Effective date of election change due to divorce


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Section 125 permits election changes (other than in the case of certain HPIAA special enrollment events), including upon divorce, to be effective only on a prospective basis.   

The Code permits an employee to pay for coverage on a pre-tax basis only for certain specified dependents.  An ex-spouse is not not one of these specified dependents.

ERISA requires plan fiduciaries to administer a health plan in accordance with its terms.  Virtually all plans provide that ex-spouses are not eligible for coverage.

If an employee notifies the employer on December 1 than he or she was divorced from his or her covered spouse on November 1 (and provides sufficient evidence of such), when can/must the employer remove the spouse from coverage?  (Leave COBRA out of the analysis.)

If the employer removes the spouse prospectively from December 1, the employer is seemingly complying with Code Section 125 but has it violated its fiduciary obligations under ERISA because it covered the ex-spouse in contradiction with the terms of the plan and must the employee impute income for the payrolls in November in which the employee paid for the ex-spouse's coverage?

If the employer removes the spouse retroactively from coverage back to November 1, will it be violating the Section 125 election change rules but be in compliance with ERISA and the other sections of the Code?

I know that the ACA's rescission rules generally prohibit retroactively terminating coverage except in the case of fraud and intentional misrepresentation.  But that means, doesn't it, that the ACA does contemplate rescissions under certain circumstances while the cafeteria plan rules do not.

To me, this is an inherent contradiction between these various laws.  I'm sure others have recognized this but I have not seen much discussion of it.

Any thoughts are appreciated.

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Where an employee or dependent loses eligibility for a benefit, I don't see there being a Section 125 irrevocable election issue caused by the retro disenrollment of the ineligible individual.  That's common for any situation (other than prohibited rescissions for medical under the ACA, as you noted) where the employer discovers late that an individual has lost eligibility for any health and welfare benefit for which employees pay on a pre-tax basis. 

The agencies also came out with an FAQ a while back stating that the ACA prohibition of rescission rules do not apply in this situation--


Similarly, if a plan does not cover ex-spouses (subject to the COBRA continuation coverage provisions) and the plan is not notified of a divorce and the full COBRA premium is not paid by the employee or ex-spouse for coverage, the Departments do not consider a plan’s termination of coverage retroactive to the divorce to be a rescission of coverage. (Of course, in such situations COBRA may require coverage to be offered for up to 36 months if the COBRA applicable premium is paid by the qualified beneficiary.)


One important note is that this was one of the items that was addressed by the Outbreak Period extensions.  So for multiple years the former spouse's COBRA rights would be preserved even by providing very late notice.  That relief is over, so the employee or spouse is going to need to notify the plan within 60 days of the divorce/legal separation to preserve the former spouse's COBRA rights.

There are also open questions as to whether it makes more sense to terminate coverage prospectively or retroactively in this type of situation, and whether disciplinary action against the employee might be appropriate for covering the ineligible individual for some expended period.

Slide summary:

2023 Newfront ERISA for Employers Guide


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