QUESTION: Our company would like to adopt a cafeteria plan, but we have heard that employees’ cafeteria plan elections cannot be changed during the plan year. Is this correct and, if so, are there exceptions to this rule?
ANSWER: You are correct that employees’ elections under a cafeteria plan generally must be irrevocable and cannot be changed during the period of coverage (typically, the 12-month plan year). However, cafeteria plans can be designed to permit midyear election changes for employees who experience certain IRS-approved events that justify midyear election changes that are “consistent” with the event. These events fall into three categories: changes in status, cost or coverage changes, and other laws or court orders.
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Changes in Status. Changes in status include “life events” such as marriage, birth or adoption of a child, and certain changes in employment. Consistency rules provide that an election change generally will be permitted if it is on account of, and corresponds with, a change in status that affects eligibility for coverage under an employer’s plan.
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Cost or Coverage Changes. The cost or coverage change events allow certain midyear election changes when there are changes in cost or coverage under a component benefit plan, or a plan of another employer, that take effect during the cafeteria plan year instead of at the beginning of the year. For example, certain election changes are permitted if there is a significant midyear increase in the cost charged to employees for employer-sponsored health coverage.
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Other Laws or Court Orders. These events coordinate cafeteria plan election changes with certain non-cafeteria plan requirements (e.g., HIPAA, COBRA, and HSA rules). For example, elections to make HSA contributions with pre-tax salary reductions under a cafeteria plan can be changed prospectively at any time. Applying this group of permitted election change events adds a layer of complexity not present with the first two groups, as some familiarity with other laws is needed to apply the cafeteria plan rules appropriately.
In addition to understanding the permitted election change events and the applicable consistency rules, you should be aware of other restrictions. For example, some events do not apply to all benefits offered under a cafeteria plan (e.g., the cost or coverage change events do not apply to health FSAs). Furthermore, election changes generally must be prospective and must be permitted under the plan, insurance policy, or other documents governing the underlying benefit. Your company may decide to allow fewer than all of the events or make them more restrictive than the cafeteria plan rules require. And the circumstances under which election changes will be permitted should be addressed in the cafeteria plan document and communicated in writing to employees.
For more information (including information about certain events not in the regulations that might permit a change), see EBIA’s Cafeteria Plans manual at Sections XIII (“General Rules Governing Participant Elections”) and XIV (“When May Participant Elections Be Changed?”).
Contributing Editors: EBIA Staff.
