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.