Updated: May 13, 2020
A cafeteria plan, or Section 125 plan, sometimes referred to as a POP plan, allows employees to pay for certain expenses on a pretax basis. Employees choose between a taxable benefit (cash, typically distributed via payroll) and two or more pre-tax qualified benefits. Just like standing in line at a cafeteria and selecting a salad, a plate of meatloaf, and a carton of milk, employees can “stand in line” and select health insurance, vision insurance, and dental insurance – and more! The IRS limits the benefits that can be offered through a cafeteria plan.
- Coverage under an accident or health plan (traditional health insurance, self-insured reimbursement plans, dental, vision, etc.)
- Health care expense reimbursement plans (FSAs)
- Dependent care assistance benefits
- Paid time off
- Adoption assistance benefits
- Health savings accounts (HSAs)
- Group term life
- 401(k) contributions
Employees can make elections and select which of the offered benefits they would like to enroll in. Employees can choose to cover other individuals, including spouses and dependents, if the employer’s plan allows. These elections are prospective, with an exception for birth, adoption and placement for adoption as well as new hires, when the employer’s plan does not impose a waiting period for new employees. The IRS considers pretax elections to generally be irrevocable unless a permitted event occurs or there is an exception. These events sometimes overlap and fall into three general categories, HIPAA special enrollment events, change in status events, and other triggering events.
A plan sponsor is not required to recognize any midyear changes to pretax elections. However, for practical purposes, because HIPAA requires group health plans to provide a special enrollment opportunity to an employee upon the occurrence of specific events (e.g. marriage, birth, adoption, etc.)¹ most plan sponsors at a minimum will design their plan to recognize HIPAA special enrollment events, permitting changes to pretax elections midyear. All of the events however are optional, and a plan sponsor must ensure their plan documents affirmatively indicate which of the events are recognized.
|Gain dependent(s) due to marriage||Employee or dependent becomes entitled to Medicare or Medicaid||Employee/dependent status change results in gaining eligibility under the plan (e.g., new job; part-time to full-time)||Plan makes SIGNIFICANT cost change||Plan makes automatics small cost change(s)|
|Lose spouse (e.g., divorce, legal separation, death of spouse)||Employee or dependent becomes entitled to premium assistance subsidy for Medicaid or CHIP||Employee/dependent employment change results in losing eligibility under employer plan (e.g., full to part-time; unpaid leave)||Plan makes SIGNIFICANT curtailment in coverage||Other employer's plan increases/decreases/ceases coverage|
|Gain/lose child (e.g., birth adoption or placement for adoption/death)||Employee or dependent loses entitlement for Medicare, Medicaid, or CHIP||Employee hours of reduced to average less than 30 hours a week||Plan eliminates/adds new benefit or coverage option||Other employer's plan offers open enrollment|
|Dependent loses/gains eligibility (e.g., child reaches age limit/becomes student after age 26)||Change in residence triggers gain/loss eligibility (e.g., move in/out of a plan services area||Employee becomes eligible to enroll in a QHP in the Marketplace||Order requiring plan to add child(ren) to health plan coverage||Order requiring another employer's plan to add child(ren) to health plan coverage|
The following situations are not cafeteria plan qualifying events:
- Change in employee’s finances
- Change in employee’s medical condition (worsens/heals)
- Provider leaves network, unless it results in a significant reduction of coverage (e.g., the only gastroenterologist in the network leaves)
- Legal separation, unless it causes the spouse to lose eligibility under the terms of the plan. (Many plans eligibility isn’t lost until divorce is final.)
- Commencement of domestic partner relationship
- Dependent or spouse leaves/returns from prison/jail, unless it causes the individual to lose HMO eligibility due to change in residence
On May 12, 2020, the IRS issued Notice 2020-29 which, among other things, allow employees to amend their cafeteria plans to permit employees to make mid-year changes for the following purposes:
- For employer-sponsored health coverage:
- Make a new, prospective election if the employee had previously declined coverage;
- Revoke an existing election and make a new, prospective election to enroll in different health coverage sponsored by the employer; or
- Prospectively revoke coverage if the employee attests in writing that they are enrolled in, or immediately enroll in, other health coverage not sponsored by the employer. The Notice provides a sample attestation employers can use and may rely on the written attestation unless the employer has actual knowledge the employee is not, or will not be, enrolled in other comprehensive health coverage.
- For FSA coverage:
- Prospectively revoke an election, make a new election, or decrease or increase an election to a health FSA (including a limited purpose health FSA) or DCAP.
Notice 2020-29 provides that employers may amend their plans to allow each eligible employee to make prospective election changes or an initial election regardless of whether the election change satisfies one of the permitted election changes under applicable Treasury regulations. The Notice is very clear that this is not a free-for-all. The employer has the discretion to impose parameters for these election changes, including the extent to which the election changes are permitted and applied, and they can limit the period during which election changes may be made.
The relief may be applied retroactively to January 1, 2020; however, as set forth above, all election changes must be prospective. The retroactive application of the relief is to cover any employer who may have allowed an election change that may not have been consistent with Section 125 (but would be consistent with one of the permitted election changes discussed above).
Finally, employers must ensure the election changes do not result in failure to comply with the nondiscrimination rules. The Notice provides strategies an employer may use to ensure there is no adverse selection of health coverage, such as limiting elections to circumstances in which an employee’s coverage will be increased or improved as a result of the election change (ex. switching from self-only to family coverage).
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¹Special Enrollment rights are not required for “HIPAA-excepted benefits” which generally include stand-alone dental, vision and most health care FSAs.
The information contained herein should be understood to be general insurance brokerage information only and does not constitute advice for any particular situation or fact pattern and cannot be relied upon as such. Statements concerning financial, regulatory or legal matters are based on general observations as an insurance broker and may not be relied upon as financial, regulatory or legal advice. This document is owned by Alera Group, Inc., and its contents may not be reproduced, in whole or in part, without the written permission of Alera Group, Inc. Reviewed as of 4/27/2020.