The IRS issued new guidance allowing employers more flexibility with cafeteria plan election changes. Employers can now permit employees to change elections if their work hours are reduced to less than 30 hours per week or if they enroll in a health plan through the Marketplace. Specifically, employees can drop employer coverage if they gain coverage elsewhere within 60 days of the change. Employers must amend cafeteria plan documents by the end of 2015 to allow these new election changes.

1. October 14, 2014
Health Care Reform Update: Week of October 13
IRS Extends Cafeteria Plan Change In Election Rules
Recently the Internal Revenue Service (“IRS”) issued Notice 2014-55, and with this guidance,
employers may now offer their employees more opportunities to change their group health plan pre-tax
elections.
Background
Cafeteria plans are maintained by employers so that employees can make insurance premium
payments on a pre-tax basis. In exchange for the tax benefit that employees receive under a cafeteria
plan, employers must impose strict rules on cafeteria plan elections, and generally those elections are
irrevocable during the plan year. If certain events occur during the plan year, the plan may permit
certain election changes on a prospective basis if the election change is made in a timely fashion after
the precipitating life event. Plan sponsors may choose to recognize all or some or none of the change
in election events that the IRS permits, and with the issuance of Notice 2014-55 from the IRS, there
are now two additional circumstances that an employer may choose to include within its plan design –
or, employers may choose to leave their cafeteria plan documents unchanged and not permit these
new freedoms.
One of the hallmarks of the IRS change in election rules, specifically those involving a change in
status (marriage, employment, etc.), is that the life event must result in a change in eligibility under
the benefit that would be impacted by the election change. With the new IRS guidance, a “change in
eligibility” is NOT a requirement for the below change in election events (though, a “change in
eligibility” remains a continuing requirement for other change in election events).
Under Health Care Reform’s Pay or Play mandate, large employers are required to offer minimum
essential coverage to full-time employees, and that coverage must be affordable and must meet the
minimum actuarial value requirements. Employers not offering such coverage will be subject to an
excise tax. Employers subject to the Pay or Play mandate must track hours and assure that eligible
“full-time” employees are offered group health plan coverage. Fluctuation in the workforce is a
reality in business, and employee work hours can also vary. Accordingly, an employee who had been
full-time and had worked 30 or more hours each week may drop hours and technically fall out of the
“full-time” employee definition. Some employers have designed their plans so that an employee may
fall below 30 hours, but may still be eligible for benefits under the plan (and certainly, employees
who are in their “stability period” – a term used under the Pay or Play mandate – may reduce hours
during that stability period without the reduction of hours impacting their eligibility for coverage).

2. October 14, 2014
Employees with fewer than 30 hours of employment each week may find it difficult or undesirable to
maintain benefits and may wish to drop their coverage. Likewise, employees participating in a plan
that is not a calendar year plan may prefer to drop the group health plan coverage and choose
coverage under the Exchange. However, benefits provided other than on a calendar year basis would
complicate the employee’s ability to enroll in the Exchange, requiring either a period of dual
coverage until the end of the employee’s group health plan year OR requiring the employee to go
without group health plan coverage for a period of time until the employee is able to enroll in the
Exchange during its annual enrollment. In both the reduction-of-hours scenario and the switching-from-
group-plan-to-Exchange scenario, the IRS has chosen to loosen the cafeteria plan rules.
The Guidance
The below guidance does NOT impact Health Flexible Spending Account elections, so the recent
loosening of the rules will not allow an employee to change his/her Health FSA election upon the
occurrence of a reduction of hours or when the employee wishes to drop the group health plan
coverage for Exchange coverage. The below guidance DOES, however, relate to group health plan
coverage that provides “minimum essential coverage” under the Pay or Play mandate.
1. Revoking group health plan coverage due to reduction in hours – If an employee had been
reasonably expected to average at least 30 hours of service per week, but there was a later
change in the employee’s status so that the employee averages fewer than 30 hours of service
per week, then the employee may revoke coverage (even if the reduction in hours did not
result in the employee ceasing to be eligible under the group health plan). The revocation is
only permitted if the individuals losing coverage because of the revocation receive coverage
under another plan that provides minimum essential coverage, and the new coverage must be
in place by the first day of the second month following the month in which the prior coverage
is revoked. The cafeteria plan may rely on the employee’s reasonable representation that he
or she (and any related individuals who are revoking coverage) has enrolled or will enroll in
another health plan that provides minimum essential coverage within the required timeframe.
2. Revoking group health plan coverage due to enrollment in the Marketplace/Exchange – If an
employee qualifies for a Special Enrollment Period to enroll in the Marketplace/Exchange OR
if an employee chooses to enroll in the Marketplace/Exchange during the Exchange’s annual
open enrollment (and the employee’s group health plan coverage is still in effect and does not
coordinate with the Exchange open enrollment), then the group health plan coverage may be
revoked for the employee and his/her dependents, and the individual(s) may enroll in the
Marketplace/Exchange and may choose coverage that is effective no later than the day
immediately following the last day of the prior coverage that was revoked. A cafeteria may
rely on the employee’s reasonable representation that the employee (and any related
individuals who are revoking coverage) have enrolled or will enroll in coverage through the
Marketplace within the required timeframe.

3. October 14, 2014
This guidance was effective on September 18, 2014 and applies on a prospective basis to revocations
of coverage after September 18, 2014 (plan sponsors may not permit employees to retroactively
revoke coverage).
Plan Action
Employers choosing to broaden their cafeteria plan change in election rules must amend their existing
Cafeteria plan documents to allow the above flexibility. The guidance provides for a special window
of opportunity that allows implementation of this guidance in 2014 as long as the Cafeteria plan is
amended on/before the last day of the plan year that begins in 2015. After 2015, the amendment must
be adopted on/before the last day of the plan year in which the changed elections are permitted, and
the plan amendment may be effective retroactively to the first day of the plan year (reminder:
employers must always inform plan participants of this plan change).
This information is not intended to represent legal or tax advice and has been prepared solely for informational
purposes. You may wish to consult your attorney or tax adviser regarding issues raised in this publication.