Cafeteria Plans May Allow Employee Revocation of Health Coverage for ACA Exchange Plan

Author: Gloria Ju

September 25, 2014

In Notice 2014-55, the Internal Revenue Service (IRS) released guidance permitting employers to allow employees to revoke their election of employer-sponsored health care coverage under a § 125 cafeteria plan in order to purchase coverage in a health insurance exchange (or marketplace) established under the Affordable Care Act (ACA). The Notice addresses the following two situations:

• A participating employee's hours of service are reduced so that the employee is expected to average fewer than 30 hours per week, but the reduction does not affect eligibility for coverage under the employer's group health plan (e.g., under certain employer plan designs intended to avoid a potential penalty under the ACA's employer shared responsibility, or pay or play, mandate; and
• A participating employee wishes to end coverage under the group health plan and buy coverage through a health insurance exchange established under the ACA without the change resulting in a period of duplicate coverage or in a period of no coverage.

When an employee's hours are reduced, the revocation of the election of coverage under the group health plan must correspond to the intended enrollment of the employee, and any related individuals who cease coverage due to the revocation, in another plan that provides minimum essential coverage. The new coverage must take effect no later than the first day of the second month following the month that includes the date the original coverage was revoked. For example, if the original coverage is revoked October 15, then the new coverage must take effect by December 1. A cafeteria plan may rely on an employee's reasonable representation that the employee and related individuals have enrolled or intend to enroll in another plan that provides minimum essential coverage and takes effect within the required time frame.

When an employee wants to enroll in a qualified health plan through an exchange, the revocation of the election of coverage under the group health plan must correspond to the intended enrollment of the employee, and any related individuals who cease coverage due to the revocation, in a qualified health plan through an exchange for new coverage that is effective beginning no later than the day immediately following the last day of the original coverage that is revoked. A cafeteria plan may rely on an employee's reasonable representation that the employee and related individuals have enrolled or intend to enroll in a qualified health plan for new coverage that takes effect within the required time frame.

If an employer decides to allow the new permitted election changes under this Notice, it must amend its cafeteria plan to provide for such changes. The amendment must be adopted on or before the last day of the plan year in which the elections are allowed. The amendment may be effective retroactively to the first day of that plan year, provided:

• The cafeteria plan operates in accordance with the guidance in the Notice; and
• The employer informs participants of the amendments.

For a plan year that begins in 2014, a cafeteria plan may be amended to adopt the new permitted election changes at any time on or before the last day of the plan year that begins in 2015. However, in no event is an election to revoke coverage on a retroactive basis allowed.

Notice 2014-55 will appear in Internal Revenue Bulletin 2014-41, which will be published October 6. The Notice became effective September 18, and taxpayers may rely on it pending further guidance.

Under current § 125 cafeteria plan rules, an employee may not revoke a group health plan election solely to enroll in an ACA exchange plan. An employee enrolled in a group health plan with a calendar plan year could remain covered under the group health plan until the end of the plan year and then immediately begin coverage under a plan purchased through an exchange. However, if the group health plan has a noncalendar plan year, an employee may not be able to synch the change in coverage to avoid an overlapping period of coverage or a period without coverage because the open enrollment period rules for exchanges do not permit the purchase of coverage beginning upon the end of the noncalendar cafeteria plan year.

Cafeteria plan special enrollment rights allow employees to revoke a group health plan election and make a new election, but these rights apply only to enrollment in another group health plan and not to enrollment in a qualified health plan purchased through an exchange. However, in the case of an event such as birth or marriage, it may be more advantageous for some employees to enroll in health coverage through an exchange than to add family members to an employer's group health plan.