Question:  When does an employee’s eligibility for Exchange coverage create a Section 125 permitted election change event to change an employer’s health plan election?

Short Answer: In two limited circumstances (both of which are unrelated to eligibility for subsidies on the Exchange), employees may experience a Section 125 permitted election change event to revoke their employer health plan election.

Section 125 General Rule: Elections Irrevocable

The general rule under Section 125 is that employee health and welfare plan elections (including an affirmative or default election not to participate) in order to pay the employee-share of the premium on a pre-tax basis through the cafeteria plan must be:

• Made prior to the start of the plan year; and

• Irrevocable for the plan year unless the employee experiences a permitted election change event.

Insurance carriers (and stop-loss providers for self-insured plans) generally follow the same Section 125 permitted election change event rules with respect to mid-year coverage change elections.

For a summary of the permitted election change events, see our Newfront Section 125 Permitted Election Change Event Chart.

First Exchange-Related Permitted Election Change Event to Revoke Employer Health Plan Election: Non-Calendar Plan Year

This event applies where the employer’s plan year is not the calendar year.  In this situation, the employee can revoke an election for employer health plan coverage at the end of the calendar year (which is in the middle of the plan’s non-calendar year) to enroll in Exchange coverage at its open enrollment for January 1 coverage.  This event allows employees to avoid a gap in coverage (or double coverage) between the end of the employer’s non-calendar plan year and the beginning of the next calendar year for open enrollment Exchange coverage.

The employee’s revocation of the employer-sponsored coverage election must correspond to the intended enrollment of the employee (and any related dependents whose coverage is also being dropped) in the Exchange no later than the day immediately following the last day the employer’s coverage is in effect.  Employers may rely on the employee’s reasonable representation that these requirements are satisfied.

Second Exchange-Related Permitted Election Change Event to Revoke Employer Health Plan Election: Special Enrollment Period on the Exchange

This event applies where an employee experiences a life event that qualifies for a mid-year Special Enrollment Period (SEP) on the Exchange.  For example, an employee who marries or gives birth would experience a SEP on the Exchange.  Employees who experience a SEP on the Exchange can revoke an election for employer health plan coverage upon utilizing the SEP to enroll mid-year in the Exchange.

The employee’s revocation of the employer-sponsored coverage election must correspond to the intended enrollment of the employee (and any related dependents whose coverage is also being dropped) in the Exchange no later than the day immediately following the last day the employer’s coverage is in effect.  Employers may rely on the employee’s reasonable representation that these requirements are satisfied.

Incorporating Exchange-Related Permitted Election Change Events in Cafeteria Plan Document

As with all of the Section 125 permitted election change events (other than the mandatory HIPAA special enrollment events), cafeteria plans are not required to offer these Exchange-related permitted election change events.  These events are optional and apply only if incorporated by the cafeteria plan document.

However, unlike most other rules under Section 125, any cafeteria plan amendment to add these Exchange-related events can be retroactive to the beginning of the plan year.  The only requirement is that the employer adopt the amendment by the last day of the plan year for which it is to apply.

Gaining or Losing Exchange Subsidies is Not a Permitted Election Change Event

Individuals with household income within 400% of the federal poverty line may be eligible for Exchange subsidies (i.e., the §36B premium tax credit) to assist with the cost of Exchange coverage if they have not received an offer of coverage from their employer that is affordable and provides minimum value.

In many situations, employees will request to change their health plan election based on the gain or loss of Exchange subsidies.  This is not a permitted election change event, and therefore employers should deny such election change requests.  For example, an employee whose Exchange subsidies are reduced or eliminated mid-year (likely because of an increase in income) does not experience a Section 125 permitted election change event to enroll in the employer’s health plan mid-year.

For more details, see our previous post: Three Main Reasons Mid-Year Enrollment Exceptions are Not Recommended.

Important Additional Notes:

• Individuals who lose Exchange subsidies do not lose eligibility for Exchange coverage.  Everyone is eligible for Exchange coverage as long as they are lawfully present in the U.S. (and not incarcerated).  Individuals who lose access to the advance premium tax credit simply are no longer eligible for financial assistance—meaning they will be required to pay the full premium to maintain the Exchange coverage.

• Keep in mind that financial hardship also is not a permitted election change event.  For more information, see our previous post: Financial Hardship Election Change Requests.

• On a different note, employees who lose or gain Medicaid/CHIP eligibility do experience a HIPAA special enrollment event to change their elections.  For more information, see our previous post: HIPAA Special Enrollment Events.

Regulations

IRS Notice 2014-55:

https://www.irs.gov/pub/irs-drop/n-14-55.pdf

Conditions for revocation due to enrollment in a Qualified Health Plan

(1) The employee is eligible for a Special Enrollment Period to enroll in a Qualified Health Plan through a 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 a Marketplace during the Marketplace’s annual open enrollment period; and

(2) The revocation of the election of coverage under the group health plan corresponds to the intended enrollment of the employee and any related individuals who cease coverage due to the revocation in a Qualified Health Plan through a Marketplace for new coverage that is effective beginning no later than the day immediately following the last day of the original coverage that is revoked.

A cafeteria plan may rely on the reasonable representation of an employee who has an enrollment opportunity for a Qualified Health Plan through a Marketplace that the employee and related individuals have enrolled or intend to enroll in a Qualified Health Plan for new coverage that is effective beginning no later than the day immediately following the last day of the original coverage that is revoked.

…

To allow the new permitted election changes under this notice, a cafeteria plan must be amended 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, provided that the cafeteria plan operates in accordance with the guidance under this notice and the employer informs participants of the amendment and provided further that a cafeteria plan may be amended to adopt the new permitted election changes for a plan year that begins in 2014 at any time on or before the last day of the plan year that begins in 2015. However, in no event may an election to revoke coverage on a retroactive basis be allowed.

Newfront Section 125 Permitted Election Change Event Chart