Let's talk about cafeteria plans. When can participants make election changes?  While cafeteria plans can be a great option for employees wishing to pick and choose benefits based on cost, when and how to facilitate election changes outside of open enrollment can be tricky to navigate for employers. As the use of cafeteria plans continue to grow, we take a deeper look at the rules and regulations of these plans, particularly as they pertain to mid-year election changes.

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Mid-Year
Elections Allowed
Under Cafeteria
Plans
By
Larry Grudzien
Attorney at Law
WEBINAR

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Webinar Presenters
PRESENTER
Lawrence (Larry) Grudzien, JD, LLM is an attorney
practicing exclusively in the field of employee benefits.
MODERATOR
Lauren Fischer is Digital Marketing Strategist,
benefitexpress

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• General irrevocability rule — no change required
for the plan year.
• 15 events are recognized by the IRS as permitting
mid-year election changes.
• Other events are recognized permitting mid-year
election changes.
• Administrative requirements that must be met to
implement a mid-year election change.
Mid-Year Election Changes
15Events

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1. Change in Status
2. Cost Changes with Automatic Increases or Decreases
3. Significant Cost changes
4. Significant Coverage Curtailment (with or without loss of coverage)
5. Addition or Significant Improvement of Benefit Package options
6. Change in Coverage under Another Employer’s Plan
7. Loss of Coverage under Group Health Plan of Governmental
or Educational Institution
15 Events for Mid-Year Election Changes

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8. HIPAA Special Events
9. COBRA Qualifying Events
10. Judgments, Decrees or Orders
11. Entitlement to Medicare
or Medicaid
12. FMLA Leaves of Absence
13. Pre-tax HSA Contributions
14. Reduction of Hours
15. Marketplace Enrollment
15 Events for Mid-Year Election Changes

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These changes include:
• Change in employee’s marital status,
• Change in the number of dependents,
• Change in employment status,
• Dependents satisfying or ceasing to satisfy dependent eligibility
requirements,
• Change in residence, and
• Commencement or termination of adoption proceedings.
• Note: The plan document must include a provision for each of the
above events if an employer wishes to allow them.
#1 Change in Status

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Change in marital status includes:
• Marriage
• Divorce
• Death of Spouse
• Legal Separation and
• Annulment
#1 Change in Status

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Change in the number of dependents:
• Birth
• Adoption
• Placement for adoption and
• Death
Note: Dependent is defined as a dependent under the Code Section 105(b),
except for children for medical coverage
• For Dependent Care Plans, a dependent means an individual eligible for
the dependent care tax credit defined in IRC §21(b)(1),
#1 Change in Status

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Change in Employment Status:
• Termination or commencement of employment
• Strike or lockout
• Commencement or return from unpaid leave of absence
• A change in work site
• Change in employment status causing a change in eligibility under the
plan (example – if the plan covers only salaried employees and the
employee becomes hourly
• Note: Any of the above events that change the employment status of an
employee, the employee’s spouse or the employee’s dependents would
qualify as a change in status.
#1 Change in Status

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Dependents satisfying or ceasing to satisfying dependent eligibility:
• Status event is one that causes a dependent to satisfy or
cease to satisfy the requirements for coverage due to attainment
of a certain age, gain or loss of student status, marriage, or
any similar circumstances
• Under the applicable consistency rule, if a dependent becomes
ineligible for health coverage due to attaining a certain age, marrying,
or losing student status, then the employee may change his or her
election to drop the dependent
• Or vice versa: An employee may add coverage for a dependent who
becomes eligible upon beginning school
#1 Change in Status

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Change In Residence:
• Change in the place of residence
of an employee, spouse or
dependent
• Change of residence would
have to change the eligibility
for health coverage
• Coverage may be dropped
where the change affects
eligibility for a managed care
option (even if the employee
could elect similar coverage)
#1 Change in Status

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Commencement or Termination of Adoption Proceedings:
• Commencement or termination of adoption proceedings also
allows an election change under an adoption assistance
#1 Change in Status

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Consistency Requirement:
• If a change in status event occurs, a plan can only permit employees
to make election changes that are consistent with the event.
• There is one “general consistency rule” and 4 special consistency rules
• Special Consistency rule for Group Term Life, Disability and
Dismemberment Coverage.
• Special Consistency Rule for Dependent Care and Adoption Expenses.
• Special Consistency Rule for Loss of Spouse’s or Dependent’s Eligibility.
• Special Consistency Rule for Gain of Eligibility under another
Employer’s Plan.
#1 Change in Status

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Consistency Requirement:
• Special Consistency rule for Group Term Life, Disability and
Dismemberment Coverage
• A participant may increase or decrease group term life, disability
and dismemberment coverage for any change in status event,
even through eligibility under the plan is not gained or lost
• The occurrence of the event is enough
• Check the insurance contract to determine whether the
event is allowed
#1 Change in Status

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Consistency Requirement:
• Special Consistency Rule for Dependent Care
and Adoption Expenses:
• This rule is satisfied if the election change on account of and
corresponds with a change in status that affects eligibility of
dependent care or adoption assistance expense for tax exclusions
available under tax code
• Election may be canceled when an employee’s child turns 13 in the
middle of the plan year and is no longer a qualifying individual
• An employee’s or a spouse’s leave of absence or other change in
employment status could also trigger this rule
#1 Change in Status

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Consistency Requirement:
• Special Consistency Rule for Loss of Spouse’s or
Dependent’s Eligibility:
• An employee can cancel accident or health coverage
for only the spouse or dependent.
• An election to cancel coverage for anyone else fails
to correspond with that change in status.
• May create a hardship under plans that offer
limited coverage categories.
#1 Change in Status

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Consistency Requirement:
• Special Consistency Rule for
Gain of Eligibility under another
Employer’s Plan:
• If coverage is gained as a result of a
change in martial or employment
status, then an employee’s election
to cease or decrease coverage for
that individual corresponds with the
change in status if coverage for that
individual becomes effective or is
increased under the other
employer’s plan
#1 Change in Status

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Consistency Requirement:
• General Consistency Rule:
• If one of the 4 special rules do not apply, then the
general consistency rule applies
• Under this rule, an election change satisfies the consistency
requirement “if the election change is on account of and
corresponds with a change in status that affects eligibility
for coverage under the employer’s plan”
#1 Change in Status

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Consistency Requirement:
• General Consistency Rule:
• The rule includes 2 elements:
• The change in status event must affect eligibility
for coverage under the employer’s plan, and
• The election change must be on account of and
correspond with the event
#1 Change in Status

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Consistency Requirement:
• General Consistency Rule:
• The change in status event must affect eligibility for coverage
under the employer’s plan
• Gain or loss of coverage eligibility under the component
benefit plan or the cafeteria plan will satisfy the consistency
requirement
• A change in status that affects eligibility includes the increase
or decrease of the number of an employee’s family member
or dependents who benefit from coverage under the plan
#1 Change in Status

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Consistency Requirement:
• General Consistency Rule:
• The election change must be on account of and correspond with
the event
• If one type of coverage is lost or gained, then the employee is
limited to changing an election with respect to that coverage
• Other eligible individuals can also be added when a spouse or
dependent gains eligibility as a change in status event
• If an employee was no previous enrolled and a change in status
occurs this rule will also allow the employee to enroll in order to
enroll the dependents
#1 Change in Status

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• Prospective changes in employee payments
corresponding to a change in the cost of a qualified
benefit may be automatically applied to all qualified
benefits except Health Care FSAs.
• The plan document must contain provisions
allowing such changes.
• If the cost difference is not significant, the payment
election change is automatic otherwise the participants
may be able to make an election change.
Automatic Increases/Decreases in Elective Contributions
as a Result of Cost Changes#2

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• If the cost of a benefits option under a cafeteria plan significantly increases
or decreases, a plan may permit a mid-year election changes
• If costs significantly increase, participants may change to less costly option
providing similar coverage or drop coverage, but can drop coverage only if
no similar plan exists
• If costs significantly decrease, participants may commence participation in
that plan option even if they had not previously enrolled in any coverage
• These rules apply to all qualified benefits except Health Care FSAs
#3 Significant Cost Changes

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• The election can be revoked if no other
benefit option providing similar coverage
is offered
• If similar coverage is available, it can be
elected but coverage can not be dropped
• Applies to all qualified benefits except
Health Care FSAs
• The plan document must contain
provisions allowing an election change
as a result of “significant curtailment
of coverage”
#4 Significant Curtailment of Coverage

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Definition of “Significant Curtailment of Coverage”
• There must be a overall reduction in coverage provided under the plan
as to constitute reduced coverage generally
• Events that constitute significant curtailment include a significant:
• increase in deductibles
• increase in co-payments, and
• increase in the out-of-pocket cost- sharing amounts under the plan
#4 Significant Curtailment of Coverage

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Definition of “Loss of Coverage”
• The complete loss of coverage under a benefit option
• A managed care plan ceasing to be available in the area
where the participant resides
• An individual losing all coverage as a result of an annual
or lifetime maximum
• A substantial decrease in the medical providers
available under an option
• A reduction in benefits for a specific type of medical
condition for which treatment is being received
• Any other similar fundamental loss of coverage
#4 Significant Curtailment of Coverage

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Definition of “Similar Coverage”
• Coverage for the same category of benefits
(e.g., major medical to major medical
• Coverage must be available to cover the same individuals
(e.g., family to family or single to single)
• A cafeteria plan may treat a spouse’s or dependent’s plan
as similar coverage
• Cost is not a factor in determining similar coverage
#4 Significant Curtailment of Coverage

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• Participants can elect new or newly improved
benefits on a prospective basis whether or
not they previously made an election under
the cafeteria plan
• Applies to all qualified benefits except
Health Care FSAs
• The plan document must contain provisions
allowing such changes
#5 Addition or Significant Improvement of Benefit Plan Option

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• Recognized when the other employer’s plan allows an election change
consistent with the regulations or when the other employer’s plan has a
different period of coverage
• A participant may make changes that correspond to changes under any
other employer’s plan – including coverage received through a domestic
partner’s plan
• The new election must be on account of and correspond with the change
under the plan of the spouse or dependent
#6 Change in Coverage of Spouse or Dependent
Under Another Employer Plan

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Four Types of Coverage Changes are Possible Under a Spouse or
Dependent’s Qualified Benefits Plan
• Mandatory changes in coverage initiated by the insurer of
the spouse’s plan
• Mandatory changes in coverage initiated by the spouse’s employer
• Optional coverage changes initiated by the spouse’s employer
• Changes in coverage initiated by the participant’s spouse during an
open enrollment
• Note: Corresponding changes to employee’s plan must be allowed by
the plan document and does not apply to Health Care FSAs
#6 Change in Coverage of Spouse or Dependent
Under Another Employer Plan

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If the plan so provides, mid-year election changes are permitted on account
of coverage losses under group health plans of certain governmental or
educational institutions, including:
• A State’s children health insurance program under Title XXI
of the Social Security Act
• A medical care program of an Indian Tribal government
• A State health benefits risk pool or
• A foreign government group health plan
• Note: Applies to all qualified benefits except Health Care FSAs
#7 Loss of Health Coverage Under Government or Educational Institution

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• Plan may permit mid-year election changes that correspond to special
enrollment rights under HIPAA
• Group health plans must allow special enrollment periods for certain
individuals:
• Individuals who did not enroll because they had coverage under
another group health plan and subsequently lose that coverage
• Employee acquires a new dependent (birth, adoption or placement for
adoption), and
• Individuals who lose or gain eligibility for Medicaid or CHIP
• Plans do not have to allow pre-tax election changes, but must at least
allow the changes on an after-tax basis
#8 HIPAA Special Enrollments

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• A cafeteria plan may permit an employee to make a mid-year election
change if a COBRA event occurs to the employee, spouse or dependent
• Employee may increase pre-tax salary reductions to cover
the COBRA premiums
Example:
• Employee has reduction of hours triggering a COBRA event
• He can increase pre-tax salary reductions to cover
cost of COBRA premiums
#9 COBRA Qualifying Event

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• A cafeteria plan may allow mid-year changes on account of judgment
decrees and orders resulting from divorce, legal separation, annulment, or
change in legal custody
Example:
• An employer receives a qualified medical child support order (QMCSO)
requiring the employee to cover a dependent child
• The employee is allowed to change his election in order to cover the child
#10 Judgments, Decrees, Orders

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• A cafeteria plan may allow mid-year election changes on
account of eligibility of the employee, spouse or dependent
for Medicare or Medicaid
• Gaining Medicare or Medicaid allows participant to cancel
or reduce health coverage
• Losing Medicare or Medicaid allows participant to elect or
increase coverage
#11 Entitlement to Medicare or Medicaid

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• A cafeteria plan may allow a mid-year election change on account of a
leave of absence under FMLA
• Employer must allow all the election changes available to employees
on non-FMLA leave
• The plan must allow participant to revoke health care coverage
if he so wishes
• Employee can reinstate coverage upon return from leave
• If employee continues coverage during an FMLA leave, employer may
allow three types of payment options: pre-pay, pay-as-you go or catch-up
These rules apply to health care FSA plans and uniform coverage rule
still applies
#12 FMLA Leaves Of Absence

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• If pre-tax HSA contributions are
offered, then prospective HSA
election changes must be allowed
at least monthly—a time period
that correlates with the HSA
monthly eligibility rules—and
upon a loss of HSA eligibility
• The employee may not change any
of his or her other elections as a
result of the HSA election change
unless otherwise permitted due to
one of the other permitted election
change events previously described
#13 HSA Contributions Pre-tax

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• An employee hours are reduced to less than 30
• Such reduction does not make employee ineligible for
medical coverage employee
• Employee can be allowed to drop coverage if employee intends to enroll in
other minimum essential coverage
Such election does not apply to Health Care FSA
#14 Reduction of Hours

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• An employee who is eligible to enroll in Marketplace coverage
(during an Marketplace special or open enrollment period) may
drop coverage midyear
Such election does not apply to Health care FSAs
#15 Marketplace Enrollment

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1. Change in status
2. COBRA qualifying events
3. Judgments, decrees or orders
4. Entitlement to Medicare or Medicaid
5. FMLA leaves of absence
Allowed Events for Mid-Year Election Changes for Health FSAs

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• Military leave under USERRA
• Mistakes made by employee or employer
• Mid-year election changes may be required
to pass non-discrimination testing
• Automatic loss of coverage
Other Events That Might Permit Mid-Year Elections

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• Obtain substantiation for reasons for the change
• Decide when the election can be effective
• Confirm that cafeteria plan regulations allow the change
• Confirm that plan document and insurance policies allow the election
Administrative Requirements for Mid-Year Election Changes

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• Remember that just because the
cafeteria plan rules may allow
midyear election changes, it does
not necessarily follow that a change
is permitted under the insurance
policy or other documents
governing the underlying benefit
• For example, an insurance policy
might not allow the change at all or
might allow it only if certain
conditions are met
Terms of the Insurance Contract
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• Yesterday, IRS released Notice 2020-29.
• It provides new relaxed rules for 2020 for making
elections under Cafeteria plans, using amounts during a
grace period.
Developments

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• The IRS provides for increased flexibility with respect to mid-
year elections under a cafeteria plan during calendar year 2020
related to employer sponsored health coverage, Health FSAs
and DCAPs.
• This notice also provides increased flexibility with respect to
grace periods and carryover periods to apply unused amounts
in health FSAs to medical care expenses incurred through
December 31, 2020, and unused amounts in dependent care
assistance programs to dependent care expenses incurred
through December 31, 2020.
Developments

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• Specifically, this notice provides that –
• For mid-year elections made during calendar year 2020, a cafeteria plan may permit employees
who are eligible to make salary reduction contributions under the plan to:
• with respect to employer-sponsored health coverage,
• make a new election on a prospective basis, if the employee initially declined to elect
employer-sponsored health coverage;
• revoke an existing election and make a new election to enroll in different health
coverage sponsored by the same employer on a prospective basis; and
• revoke an existing election on a prospective basis, provided that the employee attests
in writing that the employee is enrolled, or immediately will enroll, in other health
coverage not sponsored by the employer (An example of an acceptable written
attestation is provided in the notice).
Developments

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• Specifically, this notice provides that –
• For mid-year elections made during calendar year 2020, a cafeteria plan may
permit employees who are eligible to make salary reduction contributions
under the plan to:
• revoke an election, make a new election, or decrease or increase an existing
election applicable to a Health FSA on a prospective basis; and
• revoke an election, make a new election, or decrease or increase an existing
election regarding a DCAP on a prospective basis;
• For unused amounts remaining in a Health FSA or a DCAP under the Cafeteria
plan as of the end of a grace period or plan year ending in 2020, a Cafeteria
plan may permit employees to apply those unused amounts to pay or
reimburse medical care expenses or dependent care expenses, respectively,
incurred through December 31, 2020.
Developments

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• The IRS indicated that these amendments are not required, and an
employer has discretion in which rules to adopt.
• If an employer wishes to adopt them, it must amend its cafeteria plan
on or before December 31, 2021.
Developments

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Questions?

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Contact Information
Larry Grudzien
Phone: 708-717-9638
Email: larry@larrygrudzien.com
Website: www.larrygrudzien.com