Under flexible benefit or cafeteria plans, once the plan year starts, employees are locked into their benefit elections and can’t make changes except in a few limited situations. But in a move that will be welcomed by employees, the IRS has recently announced rules that take effect immediately and greatly expand your employees’ ability to make mid-year election changes.
Getting Ready
The IRS issued regulations that spell out a laundry list of circumstances under which plans may permit employees to modify their accident, health or group life insurance benefits. It also proposed regulations that would allow additional mid-year changes for other benefits, including dependent care and adoption assistance. The IRS says plan administrators can implement both the final and proposed rules now, even though the final regulations technically don’t go into effect until January 1, 2001.
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If you choose to follow the new rules right away, you don’t have to amend your plan immediately, according to Bruce L. Ashton, partner at Reish & Luftman, a Los Angeles employee benefits law firm. Instead, you can change your plan documents when your next plan year starts. But you should indicate that the amendment is retroactive to the date you actually changed your procedures. However, if you currently have written administrative procedures specifying when employees can change their benefit elections, Ashton recommends updating them before implementing the new rules.
Expanded Options
Events that trigger an employee’s right to make mid-year changes to their accident, health and group life insurance benefits include:
- Change in employment status. Benefit elections can be revoked or amended if the employment status of the worker, their spouse or dependent changes. This includes termination, a strike or lockout, going on or returning from an unpaid leave of absence, or even shifting from hourly to salaried.
- Family leave. An employee taking family and medical leave may change their election.
- Worksite transfer. For example, an employee who has elected an HMO but is then transferred outside the HMO’s service area could change their election.
- Return to work. You could permit an employee who quits and returns after more than 30 days to change their election. But if the gap is shorter than 30 days, the person’s prior election would automatically be restored.
- New marital status. An employee whose marital status changes could make a mid-year election modification.
Proposed Rules Under Discussion
The proposed regulations spell out other situations when employees can make mid-year adjustments to their accident, health, group life insurance, dependent care and adoption assistance benefits:
- New costs. An employee could modify their election if there is a change in the cost or coverage under a flexible spending program, regardless of whether the plan is fully insured or self-funded. So, should the premiums for a traditional health plan increase significantly mid-year, an employee could switch to a lower-cost HMO if one is offered.
- Dependent care changes. For example, if the employee’s child care provider raises their rates, the worker could change their election by increasing their contribution.
- Modification by one spouse. If two spouses are employed by different employers whose health plans operate on different plan years and one spouse changes a benefit during open enrollment, a corresponding mid-year change for the other spouse would be permitted.