The Internal Revenue Service (“IRS”) released new rules allowing an employer to adopt a
cafeteria plan provision under which an employee can revoke his/her election to pay for
group health plan coverage upon a reduction in hours and purchase of other health coverage
or to purchase health insurance through a state or federal Exchange.
Background
Under current IRS cafeteria plan regulations, an employee must make an advance election to
reduce a portion of his or her salary that will be used on a pre-pay basis for health insurance
premiums and other medical expenses. The election must be irrevocable during the year
except to the extent that there has been a change in status of the employee during the year.
Under the regulations, changes in status that could lead to a permissible change in the
cafeteria plan election include a change in marital status, or a change in number of
dependents. In addition, under current regulations, a change in employment status can only
lead to a permissible change in the cafeteria plan election if it results in a change in plan
eligibility. This could be problematic in certain instances. For example, if an employer is
subject to the employer mandate and uses a look-back measurement method, an individual
could be locked into his election for the duration of his stability period even if he has a
reduction in hours. Additional information on the employer mandate is available at:
http://www.groom.com/resources-867.html.
Under the Affordable Care Act (“ACA”), individuals can purchase health insurance coverage
through a state or federally-run Exchanges. Low and moderate-income individuals may be
eligible for tax credits and other subsidies for insurance purchased through an Exchange if
the individual is not eligible for minimum essential coverage from his or her employer or if
the coverage is unaffordable or it does not provide minimum value. These subsidies can be
very helpful in making insurance coverage affordable for low and moderate income
individuals. Individuals who elect to make salary reduction contributions to a cafeteria plan
are not eligible to purchase insurance under an Exchange and receive the subsidies, and the
IRS regulations may make it difficult for an employee to change that election. It is important
to note that an individual cannot use a cafeteria plan to purchase health coverage under an
Exchange (except through the SHOP Exchange).
Read the full article here.
Contact Steven G. Cosby, MHSA with questions or to request more information and to schedule a healthcare plan evaluation, savings analysis or group plan solution for your company.
