November 5, 2014
Recently, the Internal Revenue Service (IRS) and the Treasury Department made two announcements affecting cafeteria plans:
This Capital Checkup summarizes these announcements.
The Affordable Care Act1 established a maximum amount for employee salary reductions under health FSAs, effective for taxable years beginning after December 31, 2012. That amount was initially set at $2,500, and did not increase for 2014. The IRS has announced that the indexed amount for taxable years beginning in 2015 will be increased by $50 to $2,550.2 This is the maximum allowed employee salary reduction.3 Employers may set a maximum lower than $2,550.
Under longstanding IRS rules, employees cannot change their cafeteria plan elections mid-year except in certain circumstances. First, the employer’s written cafeteria plan must permit mid-year election changes. Second, any election changes that the plan allows must be permitted under IRS rules. For example, employees may be permitted to change their elections when they experience certain life events (e.g., get married, have or adopt a child, lose or gain eligibility under the terms of the plan), but they can only make election changes that are consistent with those events.
Under Notice 2014-55,4 employers may amend their cafeteria plan to allow employees to prospectively revoke an election of coverage under a group health plan in two additional circumstances:
In both cases, an employer may rely on the employee’s reasonable representation that the employee (and related individuals also enrolled in the plan) intends to enroll in another health plan or a QHP. The new election change rules do not apply to health FSAs.
Notice 2014-55 took effect September 18, 2014. Employers must amend their cafeteria plans within certain time frames if they wish to permit these changes. An employer has until the last day of the plan year that begins in 2015 to amend the cafeteria plan to allow these election changes during the plan year that begins in 2014. A plan amendment may be applied retroactively to the first day of the affected plan year, provided that the cafeteria plan operates in accordance with Notice 2014-55. While the plan amendment may take effect retroactively, election changes that are made apply prospectively only.
Employers with non-calendar-year plan years may be particularly interested in the new change in status rules. When an employer has a non-calendar-year plan, the plan open enrollment may not align with the Marketplace open enrollment period. Without a change to the employer’s cafeteria plan rules, employees who prefer to enroll in a Marketplace plan (instead of the employer’s plan) might have to remain uninsured for some period of time (which could trigger an individual mandate penalty) or pay simultaneously for both types of coverage. While this is the most likely scenario where such an election change might benefit employees, this option is not limited to plans that operate on a non-calendar-year basis.
In deciding whether to amend their cafeteria plan to permit these new types of election changes, employers may wish to consider whether enrollment in a Marketplace plan could trigger a penalty under the employer shared responsibility penalty. This could happen if the employee is a full-time employee (or is in a stability period where the employer must treat the employee as a full-time employee6) and the coverage that the employer offers to that employee does not meet the 60 percent minimum value test or is unaffordable for that employee. If such an employee qualifies for a premium-assistance tax credit when purchasing a Marketplace QHP, the receipt of the tax credit could trigger the employer penalty.
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As with all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their legal counsel for authoritative advice on the interpretation and application of the guidance summarized in this Capital Checkup. Sibson Consulting can be retained to work with plan sponsors and their attorneys on compliance issues.
1 The Affordable Care Act is the shorthand name for the Patient Protection and Affordable Care Act (PPACA), Public Law No. 111-48, as modified by the subsequently enacted Health Care and Education Reconciliation Act (HCERA), Public Law No. 111-152. (Return to the Capital Checkup.)
3 If they have not already done so, employers must amend cafeteria plans no later than December 31, 2014 in order to implement the ACA’s new limitation on salary reduction contributions to health FSAs. (Return to the Capital Checkup.)
5 The employee must intend to enroll in a Marketplace QHP with coverage effective no later than the day immediately following the last day of the coverage that is revoked. (Return to the Capital Checkup.)
6 Employers using the look-back measurement method for determining full-time status under the final employer penalty rule must treat employees as full-time employees during an associated stability period if they work full-time during the measurement period. (Return to the Capital Checkup.)