IRS Information Letter: Cafeteria Plan Need Not Permit Midyear Election Changes

The IRS has issued an information letter that summarizes the permitted election change rules for cafeteria plans. The letter responds to an inquiry regarding an employee whose request to make a DCAP election change due to a “disrupted or unforeseeable child care environment” was denied because it did not occur during the plan’s open enrollment period. The letter explains that a cafeteria plan’s terms generally must require that employees’ benefit elections be made before the period of coverage (typically, the plan year) and prohibit employees from changing their elections during the period of coverage. While plans may be designed to permit certain midyear election changes for employees who experience IRS-approved events—e.g., a significant change in coverage or a significant increase or decrease in the cost of coverage—this is not required. Furthermore, plans must be operated in accordance with their terms. The letter concludes that if an employee is not allowed to make a midyear election change, it may be because the plan’s terms do not permit the change.

EBIA Comment: This information letter does not break new ground or include any surprises. But like some other recent IRS letters (see, for example, our Checkpoint article), it may provide helpful support when explaining a plan’s operating rules or decisions. IRS officials have indicated that an election change should be permissible whenever a participant changes dependent care providers. Most cafeteria plans allow midyear election changes, but some employers decide not to allow all of the IRS-approved events or make them more restrictive than the rules require. Note that if HSAs are offered through a cafeteria plan, employees must be allowed to start, stop, or otherwise change their HSA elections prospectively at least monthly (see our Checkpoint article). In any event, the circumstances under which election changes are permitted should be addressed in the cafeteria plan document and communicated in writing to employees. For more information, see EBIA’s Cafeteria Plans manual at Sections XIV.A (“Election Changes: Overview and Key Points”), XIV.B (“Checklist for Cafeteria Plan Election Change Requests”), and XIV.F.6 (“DCAP Election Changes—Broad Rules Apply”).

Contributing Editors: EBIA Staff.