IRS Expands Rules for Health Coverage Changes

Notice 2014-55 addresses two specific situations in which an Internal Revenue Code Section 125 cafeteria plan participant may wish to revoke, during a period of coverage (commonly a plan year), their election for employer-sponsored health coverage under the cafeteria plan in order to purchase a qualified health plan through the federal exchange or a health insurance marketplace established by the Patient Protection and Affordable Care Act (ACA).

The first situation involves a participating employee whose hours of service are reduced so that the employee is expected to average less than 30 hours of service per week but for whom the reduction does not affect the eligibility for coverage under the employer’s group health plan. (The IRS says this may occur, for example, under certain employer plan designs intended to avoid any potential employer penalty payment under the ACA.) The second situation involves an employee participating in an employer’s group health plan who would like to cease coverage under the group health plan and purchase coverage through the exchange without that resulting either in a period of duplicate coverage or in a period of no coverage.

The IRS explained that under the current change-in-status rules, a cafeteria plan may not allow an employee to revoke an election under the group health plan during a period of coverage solely to enroll in a qualified health plan through the federal exchange. For an individual enrolled through a cafeteria plan in a group health plan with a calendar plan year, the employee may continue his or her coverage under the employer’s plan for the remainder of the plan year and then begin coverage under the exchanged during open enrollment. However, an individual enrolled through a cafeteria plan in a group health plan with a non-calendar plan year might not be able to synchronize the change in coverage to avoid an overlapping period of coverage or a period without coverage because the open enrollment period for the federal exchange is based on the calendar year.

Also, change-in-status rules relate only to enrollment among group health plans offered by employers, not to enrollment in a plan offered through the federal exchange. However, the IRS notes, in the case of an event such as a birth or marriage, it may be more advantageous for some individuals to enroll themselves and their family members in a federal exchange plan rather than to add family members to an employer’s group health plan.

Notice 2014-55 permits a cafeteria plan to allow a participating employee to revoke an election in order to obtain coverage through the federal exchange. Conditions for revocation due to reduction in hours of service include:

• The employee has been in an employment status under which the employee was reasonably expected to average at least 30 hours of service per week and there is a change in that employee’s status so that the employee will reasonably be expected to average less than 30 hours of service per week after the change, even if that reduction does not result in the employee ceasing to be eligible under the group health plan; and

• The revocation of the election of coverage under the group health plan corresponds to the intended enrollment in another plan that provides minimum essential coverage, with the new coverage effective no later than the first day of the second month following the month that includes the date the original coverage is revoked.

Conditions for revocation due to enrollment in a qualified health plan through the federal insurance marketplace include:

• The employee is eligible for a special enrollment period to enroll in a qualified health plan through the marketplace pursuant to guidance issued by the Department of Health and Human Services and any other applicable guidance, or the employee seeks to enroll in a qualified health plan through the marketplace during the marketplace’s annual open enrollment period; and

• The revocation of the election of coverage under the group health plan corresponds to the intended enrollment for new coverage that is effective beginning no later than the day immediately following the last day of the original coverage that is revoked.

The guidance in this notice is effective on September 18, 2014. To allow the new permitted election changes under this notice, an employer must amend its cafeteria plan to provide for such election changes. The amendment must be adopted on or before the last day of the plan year in which the elections are allowed, and may be effective retroactively to the first day of that plan year.

Text of Notice 2014-55 is here.