If you work in human resources the following scenario should sound familiar: An employee wanders in and starts to complain bitterly that they can no longer afford the medical or dental coverage they signed up for and demand you let them drop the coverage immediately (midyear). Good luck explaining that it’s not you who won’t let them drop their coverage. It’s those pesky rules in place within the IRS Section 125 plan you have in place.
Internal Revenue Code Section 125 cafeteria plans state that participant elections must be made before the first day of the plan year or the date taxable benefits would currently be available, whichever comes first. These elections are generally irrevocable until the beginning of the next plan year. This means that participants cannot make changes to their cafeteria plan elections during a plan year just because they no longer want the coverage.
IRS regulations do permit employers to design their cafeteria plans to allow employees to change their elections during the plan year if certain conditions are met. The IRS clearly lists permitted or qualifying events that allow participants to change his or her election midyear as long as the change is consistent with the event. Some examples are an employee has a spouse who loses or gains employment, birth of a child, marriage and divorce. Also, the IRS did expand the midyear election change rules in response to certain Affordable Care Act (ACA) provisions.
Download our Compliance Overview Brief, Cafeteria Plans: Midyear Election Changes, for all the details on permitted election changes: