14 Sep Simplifying the Administration of Cafeteria Plan Election Changes
Originally posted by ubabenefits.com
Election change requests are the most rule-centric item encountered in the day-to-day administration of a cafeteria plan. Most cafeteria plans, although not required to do so, allow election changes to the fullest extent permitted by law. But what makes these requests so tedious is the fact that administrators and employees must ‘prove the exception’ to the general rule that cafeteria plan elections are irrevocable and cannot be modified mid-year.
Usually, employees will request a change to their cafeteria plan election for a “life event” that is fairly straightforward – e.g., marriage, divorce, new child, etc. But for other “change in status” events, the governing IRS regulations can be nuanced with no definitive answer as to whether an election change is permitted. While implementing administrative procedures to help make these determinations is important, the process is incomplete without a general understanding of the change in status rules to fill in the gaps.
The Change in Status Regulations
Although its name sounds like a George Orwell novel, the “life events” described in the Change in Status Regulations are much more mundane. The IRS has identified six categories of change in status events in the regulations. These are: (1) a change in legal marital status; (2) a change in the number of dependents; (3) a change in employment status; (4) when a dependent satisfies or ceases to satisfy dependent eligibility requirements; (5) a change in residence, and; (6) the start or termination of an adoption proceeding (where adoption assistance is provided through the cafeteria plan).
Any event not falling within one of these six event categories cannot serve as the basis for an election change. However, the Change in Status Regulations do not provide a complete list of permissible events within each category. For example, the change in employment status category describes events where the employee, employee’s spouse, or the employee’s dependent loses or gains eligibility status for the applicable benefit. Terminations, new jobs, leaves of absence, and changes in worksite are all identified as a change in employment status event. But a change in employment event may also occur if a spouse loses coverage due to a reduction of hours or an employee becomes eligible for benefits at a second employer.
An employee walks into HR . . .
From a plan administration perspective, the first consideration should be whether the terms of the cafeteria plan permit a change to the election for the event that occurred. Cafeteria plans are permitted to allow an election change for any of the events covered by the Change in Status Regulations, but are not required to do so. Instead, plan sponsors may restrict the number of event categories or narrow the types of events where an election change is allowed in each category. What the cafeteria plan cannot do is create additional event categories or have more lenient requirements than the Change in Status Regulations.
The eligibility criteria for the underlying insurance policies and plan documents of the component benefits should also be reviewed. These documents are critical in the determination process because the IRS requires that an election change be consistent with the change in status event (which must have already occurred). Generally, the consistency requirement means the election change must reflect the event. For example, a recently divorced employee’s election change request to move from employee-only to family coverage would not be “consistent” with the divorce and the request should be denied.
Administrators should then substantiate the reason for the change in election. This requirement may be satisfied by obtaining an employee’s certification that the event occurred and, unless there is reason to believe it did not, no additional follow-up is required.
Once the employee has certified the date of the event, administrators should re-visit the plan document to determine whether the change request is subject to any time requirements. Cafeteria plans normally impose a 30-60 day window for requesting the election change. Plans with extended time limits, or none at all, may find it difficult to satisfy the consistency requirement because there may no longer be a causal connection between the change in status event and election change request.
Change in status events are not the only occasions where cafeteria plan participants may be permitted to revoke or modify an election, although they are the most common. Events such as changes to the cost or coverage of a group health plan, HIPAA special enrollment rights, FMLA, COBRA qualifying events, and funding of an HSA with pre-tax contributions all have unique rules and considerations. Some events may allow an election change for one component benefit of the cafeteria plan but not the other (e.g., dependent care FSA vs. health FSA) or affect an employee’s ability to make pre-tax contribution.
Even the most detailed procedures and checklists will not exhaust all of the variables administrators must account for when reviewing election change requests. However, using a checklist or similar document will focus your approval determination toward ensuring that a cafeteria plan election change is permitted and meets the IRS’s requirements. Unique circumstances are bound to occur within any workforce and a consistent process will aide in the identification of issues that need to be considered further or require the assistance of legal counsel.