Q: We have a non-calendar year Section 125 premium-only plan that renews on July 1, 2014. An employee who declined coverage last year now is asking if he can enroll as of February 1, even though open enrollment is not until June 1, 2014. We'd like to accommodate her request, but we're concerned that doing so would violate the Section 125 restrictions on changes outside of open enrollment and jeopardize the tax advantaged status of the plan?
A: Timing is everything, and you may be in luck. As part of the ACA rollout and startup of the public exchanges, or marketplaces, the IRS has taken steps to allow greater flexibility for individuals to make changes in salary reduction elections for medical plans provided through Section 125 plans for non-calendar plan years beginning in 2013.
To take advantage of this "transition relief," described in IRS Notices 2013-42 and 2013-71, you will need to amend your written plan. This will allow employees to make certain changes in salary reduction elections previously prohibited, even if they do not experience any of the enumerated changes in status that trigger the right to change an election in the middle of a plan year under current IRS Section 125 regulations.
Generally, Section 125 cafeteria plan elections must be made before the start of the plan year and are irrevocable during the plan year, with limited exceptions, including certain changes in status. Under existing regulations, the availability of health plan coverage through an ACA insurance exchange beginning with calendar year 2014 does not constitute such a change in status.
Under the IRS transition relief that sidesteps this restriction and would seem to offer the desired option to your employee, an employee who failed to make a salary reduction Section 125 cafeteria plan election during the 2013 open enrollment period is allowed to make a one-time election change after the first of the year starting in 2014.
This offers employees the opportunity to enroll in their employer's non-calendar year plan outside of open enrollment in order to comply with the ACA's calendar year individual mandate and avoid the penalty for failing to obtain coverage. This should be sufficient to accommodate your employee's situation and request.
The second transition relief circumstance in which a previously prohibited election change is permitted occurs when an employee who elected coverage under his employer's Section 125 cafeteria plan is allowed to prospectively revoke or change his or her election once during that plan year.
This option reflects the IRS's concern that an employee's preferences may change due to the implementation of the ACA, and he or she may wish to explore coverage through a state exchange.