February 2009

Employees’ cafeteria plan elections — whether for a flexible spending account, premium-only plan, or choice of benefits — are required to be irrevocable and generally may not be changed during the plan year. However, IRS regulations for cafeteria plans recognize that changes in an individual’s circumstances sometimes do occur, and therefore permit cafeteria plans to allow mid-year election changes based on certain changes in status.

Since the idea of making an irrevocable choice can seem daunting to employees, most employers permit election changes based on the IRS-approved changes in status. Cafeteria plan regulations require employers that permit such changes to incorporate the status change rules into their written plan document.

So, under what circumstances may an employee revoke his or her cafeteria plan election and make a new one? IRS regulations provide for these change-in-status events:

• A change in legal marital status, resulting from marriage, death of a spouse, divorce, legal separation or annulment.
• A change in the number of dependents, resulting from birth, death, adoption or placement for adoption.
• A change in the employment status of the employee or of the employee’s spouse or dependent, resulting from commencing or terminating employment, being on strike or lockout, beginning or returning from an unpaid leave of absence, or changing worksites. Also, if the employee (or spouse or dependent) has a change in employment status affecting plan eligibility (such as moving from salaried to hourly when there are separate plans for each group), a mid-year election change is allowed.
• A dependent satisfying or ceasing to satisfy eligibility requirements (such as a child reaching the maximum age for dependent children under the plan).
• A change in the residence of the employee, spouse or dependent (potentially important for HMO coverage areas).

Even if an employee has had one of these change-in-status events, an election change is permitted only if it satisfies a consistency rule. This rule requires that the change be on account of and correspond with the change in status that has affected eligibility for coverage under the plan. So, for example, if the status change were the employee’s divorce, the only election change that would satisfy this consistency rule would be to cancel coverage for the ex-spouse; changes with respect to the employee or other covered dependents would not be allowed. However, if a court order required the ex-spouse to provide coverage for dependent children, a separate provision in the regulations would allow the employee to cancel dependent coverage.

In the case of an employee or other dependents newly gaining eligibility mid-year under the plan of a family member, such as if the employee marries and is eligible for coverage under the new spouse’s plan, the consistency rule would permit the employee to cancel coverage only if he or she actually became covered under the new spouse’s plan.

In addition to changing elections on account of a family status change, employees are permitted to revoke existing elections and make new ones that correspond to the employee’s special enrollment rights under HIPAA. An employee also can make an election change when the employee, or a spouse or dependent, becomes enrolled in Medicare or Medicaid.

All permitted election changes can only be made prospectively.

The election change limitations do not apply to health savings account (HSA) and 401(k) contributions. If HSA contributions are made through salary reduction under a cafeteria plan, employees may prospectively elect, revoke or change their salary reduction elections for the HSA at any time, so long as it is with respect to salary that was not currently available at the time of the election. 401(k) contributions, if part of a cafeteria plan, are subject to the 401(k) regulations, and not those for cafeteria plans.

It has been several years since the IRS finalized guidance on when employees can make mid-year changes to their cafeteria plan elections. However, these rules can sometimes be difficult to apply, given the array of circumstances that life can sometimes throw our way. The IRS guidance does include many examples on how to apply the rules. Also, cafeteria and spending account administrators, or your benefits professional, can be useful sources of information in understanding the election change rules.

We live in a culture of immediate gratification. “On-demand” cable television services, pre-prepared foods from the grocery store, fast-food carryout, and diet programs that claim you will shed pounds “without trying” all are signs that Americans have lost sight of the fact that not everything can be obtained without waiting. And when it comes to changing behaviors to eliminate unhealthy habits and adopt healthy ones — such as giving up cigarettes, losing weight, exercising more, and managing stress effectively — hard work and sustained personal effort also are required. In order to succeed, workplace wellness programs need to recognize this and include elements that engage employees over time.

Suppose you host a brown-bag lunch in your company cafeteria with a presentation on the health benefits of eating right and leading an active lifestyle. You might find that this seminar is well-attended, but observe that few employees actually seem to make the recommended changes, and that even fewer are doing so after a few months. This experience is all too common, and reflects the reality that more individuals are well-intentioned than are self-motivated. Your wellness initiatives, therefore, need to provide the motivation. Here are a few ways to do this:

• Personalize the experience by offering health risk assessments that show each employee, on an individual basis, their current health risks and the steps they should take to address them.
• Tie any offered health risk assessment incentives — such as reduced health plan premiums — not only to taking the assessment, but also to completing any recommended follow-up actions.
• Focus on helping employees want to make the sought-after lifestyle changes, because behavior change is more likely when an individual is ready to make it. This can involve offering incentives as discussed above, but also thinking of ways that would help employees see the risks of not changing (such as posting clear statistics on differences in lifespan for smokers versus non-smokers, individuals with normal blood pressure versus those with hypertension, individuals who maintain a healthy weight versus those who are overweight or obese, etc).
• Provide motivation in the form of support systems. This could involve initiatives such as Weight Watchers at Work, lunchtime walking clubs, articles in company newsletters on employee success stories, providing lists of local gyms and a small company subsidy for joining, sponsoring a “biggest loser” competition, and the like.

Most of us find any change difficult, and lifestyle changes can be daunting. Remember this facet of human nature when implementing wellness programs, and you might find employees more engaged in them, over the long run.

We live in an age of information overload. Mail piles up (both at the front door and in our e-mail inboxes) due to the volume we receive on a daily basis. Many of us quickly and automatically trash (or, if paper, recycle) everything but bills, personal or business letters, or other items that we can quickly identify as of interest or importance.

For employers, this situation adds to the challenge of communicating employee benefits matters. Employers, more than ever, are faced with developing benefits communications that employees don’t automatically zone out. Thinking about the employees in your work force and attempting to customize, or target, communications to different employee groups can help make your communications efforts more effective.

Today’s work force comprises roughly three “generations” of employees: Baby Boomers, born from 1964 and earlier; Generation X, born from 1965-1980; and Generation Y, born after 1980. Each group has different needs and focuses.

Young and in the early stages of their working careers, members of Generation Y are unlikely to be thinking about the importance of saving for retirement. They might also still have that feeling many of us have when we are very young, of infallibility and immortality, and therefore not pay attention to the health benefits their employer offers. Used to quick-changing media images, individuals in this group likely will have short attention spans, and as such could be more receptive to communications that are brief, eye-catching, and to the point, and to electronic media, such as e-mail and Internet.

Many Generation Xers are at a time in their lives when they have significant competing financial responsibilities — raising a family, acquiring a home, thinking forward to future retirement and children’s college education, and perhaps contributing toward the care of elderly parents. These employees will have been in the work force long enough to be aware of retirement plans, but might not be contributing (or not contributing enough) because of their competing financial responsibilities. Making budgeting tools a highlight of retirement plan communications could be one way to get the attention of this group. Another benefits resource likely to be useful to this group is the resource and referral services of an employee assistance program (EAP), for childcare and eldercare referrals. However, these employees might not be as aware of EAP availability as they are, say, of a retirement or health plan. Leading off communications with how the EAP can be a resource for helping to juggle multiple responsibilities can be a gateway to information on other relevant benefits.

Nearing retirement, many Baby Boomers are catching up on missed savings opportunities while preserving the value of any wealth that they have accumulated. They also might be more focused on health issues as they grapple with the effects of aging. Communications that home in on these topics are likely to generate more interest among members of this employee group.

The concept behind targeted communications is simple: We are more likely to pay attention to what interests us. Determining how to reach each group, and crafting communications accordingly, can lead to an increased ability to communicate more effectively with each group. Our benefits specialists can help. Contact us today!