On October 11, 2022, the US Department of Treasury (Treasury) and the Internal Revenue Service (IRS) issued final regulations to modify how affordability under the Affordable Care Act (ACA) is determined for an offer of coverage to a family member by an employer-sponsored group health plan, effective for the tax year beginning after December 31, 2022. By changing the affordability analysis to look at the total cost to cover family members—rather than the cost to only the employee—the new rule expands eligibility to receive premium tax credits (PTCs) in the ACA marketplace to an employee’s spouse and dependents.
In Notice 2014-55, the Internal Revenue Service (IRS) announced two new situations in which employees may change their health plan elections midyear under their employer’s cafeteria plan. In the first, an employee’s hours are reduced below 30 per week (without a corresponding loss of eligibility for the employer’s group health plan). In the second, an employee decides to enroll in coverage through a Marketplace Exchange (Exchange). Both of these are optional changes in status; neither is mandatory.
Reduction in Hours
If an employee who was expected to work on average at least 30 hours per week is then expected midyear to work on average less than 30 hours per week, the employee may drop his or her employer-provided group health plan coverage, even if the reduction in hours does not result in the employee’s loss of eligibility under the group health plan. The change in election must correspond to the employee’s intended enrollment (and the intended enrollment of any family members whose coverage is being dropped) in other minimum essential coverage (group health plan or Exchange). The new coverage must be effective no later than the first day of the second month following the month in which the employer-sponsored coverage is dropped. The administrator of the employer’s cafeteria plan may rely on an employee’s reasonable representation about the intended enrollment.
Exchange Coverage
An employee who is eligible to enroll in Exchange coverage (during an Exchange open enrollment or special enrollment period) may drop employer-provided group health plan coverage midyear. The change must correspond to the employee’s intended enrollment (and the intended enrollment of any family members whose coverage is being dropped) in Exchange coverage that is effective no later than the day after the last day of the employer-sponsored coverage. The administrator of the employer’s cafeteria plan may rely on an employee’s reasonable representation about the intended enrollment.
Plan Amendment
If an employer chooses to adopt one or more of these midyear election changes for its cafeteria plan, a plan amendment is necessary. The amendment generally must be adopted on or before the last day of the plan year in which the additional changes are allowed and can be effective retroactively to the first day of that plan year, provided that the plan operates in accordance with the guidance, including notification to participants of the amendment.
Special Rule for the 2014 Plan Year
Under a special rule, an employer that adopts these new midyear election changes for its 2014 cafeteria plan year has until the last day of the 2015 plan year to adopt the amendment. Although plan amendments may be adopted retroactively, election changes to revoke coverage retroactively are not permitted.
Please join McDermott partners, Diane Morgenthaler and Jamie Weyeneth, on October 16-18 at the 2013 ERISA Basics National Institute in Chicago, IL. Designed for in-house and union counsel, benefits specialists, private practitioners, litigators, consultants and accountants, this conference provides an opportunity to hear from the ERISA experts. For more information, click here.
The Internal Revenue Service (IRS) recently released guidance on the implementation of the $2,500 limit on health flexible spending accounts (FSA) scheduled to go into effect in 2013. IRS Notice 2012-40 (Notice) clarifies the application of the new limit for plan years beginning after 2013 and solicits comments regarding whether to modify the use-or-lose rule set forth in the current proposed regulations under Section 125 of the Internal Revenue Code of 1986, as amended (Code).
The Notice states that the $2,500 limit on contributions to health flexible spending accounts is applicable for plan years beginning on or after January 1, 2013. This means that non-calendar year plans do not need to institute a mid-year limit to comply with applicable law. In addition, the Notice states that the $2,500 limit does not apply to heath savings accounts or health reimbursement accounts or “flex-credits” granted by an employer. In addition, for cafeteria plans under Section 125 of the Code with grace periods which allow use of contributions for up to two and one-half months after the end of the plan year, the $2,500 limit does not apply to any amounts contributed for the previous plan year and available during such grace period.
If an employee erroneously contributes more than $2,500 to his or her health flexible spending account for plan years beginning on or after January 1, 2013, the Notice provides for a correction method for employers to refund amounts over the limit to the employee and adjust the employee’s reportable wages for the applicable tax year. This correction method is available only if the employer has complied with the written plan requirements of Section 125 of the Code, the erroneous contribution was due to reasonable mistake and not willful neglect by the employer and the employer’s cafeteria plan is not under examination for the plan year in which the erroneous contributions occurred.
The Notice also provides that employers may amend the cafeteria plan anytime prior to December 31, 2014 to comply with the new FSA limit. Such amendment may express the limit as a maximum dollar amount or use another method to express the new $2,500 limit. The $2,500 limit will be subject to cost of living increases and this type of indexing should be considered when drafting any required amendments.
Finally, the Notice requests comments on modifications to the use-or-lose rule for health flexible spending accounts currently in effect given implementation of the new dollar limit. McDermott will continue to update employers on any changes to the use-or-lose rule for health flexible spending account plans.
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