HR Hotline: Rules for Midyear Health Plan Election Changes

Q: An employee says he no longer wants to participate in our health plan and has insisted that we immediately stop deducting premium contributions from his paycheck because he needs extra cash to buy a new car. Can an employee drop his or her coverage under our group health plan in the middle of our plan year? Our plan is on a calendar year cycle, and contributions are made on a pretax basis under a Section 125 Premium Only Plan (POP).

A: In situations like this, I often suggest offering to examine any documentary support an employee can present to back up a demand. In this particular case, however, you can confidently advise your employee that you cannot suspend his wage deductions at this time for the reason he is giving you.
Generally, it’s important to communicate to employees that Section 125 elections are irrevocable for the duration of the plan year, with very limited opportunities to make midyear changes, including revoking a benefit election.
An employee’s pressing personal financial matter is not one of the permissible circumstances for making a midyear election change, including dropping coverage. Allowing election changes not permissible under IRS provisions could result in your plan losing its tax-favored status, in which case all employees might be taxed on deductions made with pretax dollars during the year.
Internal Revenue Code Section 125 permits employees to pay for group health insurance coverage from an employer-sponsored plan using pretax wages, thereby maximizing the value of their money when used for this purpose.
To preserve this tax-favored arrangement, commonly referred to as a cafeteria plan, employers must limit election changes to specified periods: a designated enrollment opportunity after employment starts; an annual open enrollment period; and midyear, but only under limited circumstances, as set forth in a written plan document.
Circumstances in which midyear election changes are permitted under IRS regulations fall into two general categories: a “change in the covered employee’s family status” or a “significant change to his or her dependents’ insurance coverage.” Specific circumstances that typically trigger a permissible midyear election change include:

• Marriage or divorce of the employee

• Death of the employee’s spouse or dependent

• Birth or adoption of a child of the employee

• Termination of employment or commencement of employment of the employee’s spouse

• A switch by the employee or spouse from part-time to full-time employment or vice versa

• The taking of an unpaid leave by the employee or dependent spouse, causing a loss of eligibility (e.g., FMLA)

• Significant change in the cost of the employee or spouse’s health coverage

• Cessation or significant curtailment of coverage under the plan originally elected

Previously, an IRS rule had permitted an employee to terminate coverage due to a “cessation of required premiums,” but that rule was deleted in 2007 and is no longer recognized under applicable IRS Section 125 regulations.