Rules allow employees to opt out of cafeteria plan coverage

Cafeteria plans may, but aren’t required to, allow employees who experience a change in status (such as a change in marital status) to change or revoke their elections. The IRS has expanded the conditions under which cafeteria plans may allow employees to revoke their elections to participate in group health plans to account for individual coverage that’s available on the exchange, which may be a better deal for them.

The new rules became effective Sept. 18, 2014. (Notice 2014-55, IRB 2014-41)

Reduction in hours. Full-time employees, who become part-time employees due to a reduction in hours to fewer than 30 a week, may still be eligible to participate in the group health plan. Under the new rules, cafeteria plans may allow these employees to opt out of a group plan that provides minimum essential coverage. Employees who opt out must intend that their individual coverage begin by the first day of the second month following the month they revoke their group coverage.

Snag: This opt-out rule doesn’t apply to health flexible spending accounts.

Special election periods. Employees who participate in cafeteria plans that use noncalendar years as their plan years, and who qualify for a special enrollment period to enroll in individual coverage through the exchange, can’t coordinate their withdrawal from the group plan and the enrollment into individual policies without having to pay for two policies or risk having no coverage for a period of time. The new rules allow these employees to withdraw from the group plan, provided their individual policies become effective the next day.

PAYROLL PRACTICE TIP: In both instances, you may rely on employees’ reasonable representations that they have enrolled or intend to enroll in individual coverage. Reminder: As with all cafeteria plan elections, employees’ revocations can’t be made on a retroactive basis. Cafeteria plans must be amended by the last day of the plan year in which revocations are allowed; amendments may be retroactive to the first day of that plan year.