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February 04, 2015

IRC Section 125 Expands Employee Options Under the Affordable Care Act

The traditional model of health insurance involves employers offering one or more very similar insurance plans to their entire full time work force, subsidizing a portion of the monthly cost, and leaving the employee responsible for paying the balance. Under Section 125 of the IRC1 the IRS allows employees to pay this premium with pre-tax dollars, subject to a myriad of rules.

One of the conditions of this tax-free treatment is that employee health care elections can only be changed once a year during the employer’s annual open enrollment period, or if the employee experiences certain qualifying events during the year.

Section 125 qualifying events include: (1) a “change in status” (such as marriage, divorce, birth or adoption, a change in employment status, and a dependent becoming newly eligible, or losing eligibility for enrollment); (2) a significant change in coverage (in cost or coverage itself); (3) judgment, decree or court order; and (4) HIPAA Special Enrollment rights. This is not an exhaustive list, but those employers most often encounter and include in their plan documents.

The Patient Protection and Affordable Care Act (PPACA) created Public Marketplaces5 or Exchanges in each state, giving individuals access to health plans regardless of their employers’ decisions to sponsor group health plans. Subsidized premium assistance is available for certain individuals enrolling in health plans through the Marketplace, but eligibility for such premium assistance involves several factors including household income and the availability of minimum value, affordable coverage through their employer.

Like employer-sponsored plans, Exchanges have an annual open enrollment period during which individuals can shop for coverage options that fit their needs and enroll in a plan. In 2013-2014 this period ran from October 1 through March 31, and for 2014-2015 it is scheduled to run from November 15 through February 15. For many employees, this Public Exchange period does not align with their employer’s open enrollment. The differing dates and respective options often leave employees confused, and employers trying to help accommodate their workforces without the necessary flexibility.

Given the strict rules surrounding election changes for employees enrolled in employer-sponsored coverage under IRC Section 125, allowing employees to drop coverage, make election changes, or add coverage only during the 30-day open enrollment period, it seemed that individuals would either have to maintain multiple health plans at the same time, or risk a period without any coverage between open enrollments. On September 18, 2014 the IRS released Notice 2014-55 addressing this very issue8 which comes as a welcomed relief to employees and employers alike.

Under the new Notice, Section 125 “qualifying events” are now expanded to include two new situations. The first, called “Revocation Due to Enrollment in a Qualified Health Plan,” contemplates an employee currently enrolled in their Employer’s health plan who experiences a change in status event, and decides to drop that plan and enroll in a Marketplace plan, outside of the employer’s annual open enrollment period. Additionally this new qualifying event applies during the Marketplace’s annual open enrollment period. Now this employee would be permitted to drop the employer plan mid year if they will be enrolling in a qualified health plan offered through the Marketplaces.

A second new qualifying event called ‘Revocation Due to Reduction in Hours of Service’ will now allow an employee who is enrolled in the employer plan during a stability period who remains eligible, but experiences a reduction in hours, to drop the employer coverage if they wish to enroll in a different minimum essential coverage plan (this includes a lower cost plan offered by the same employer). Previously, a reduction in hours event would require loss of eligibility in order for the employee to make a mid year revocation. In both cases employers may rely on employees’ statements that they intend to enroll in another qualified health plan, and employees are not required to offer proof of such other enrollment. It is important to note that while these events allow a medical plan election change, they do not allow a change for flexible spending accounts (FSAs).

This new flexibility will give employees more freedom in choosing weather to maintain employer-sponsored group coverage, or opt for a Marketplace plan option instead. It is worth noting that unlike premiums for employer-sponsored health plans, premiums for Marketplace plans cannot be paid on a pre-tax basis which may affect employees’ decisions.

Employers will need to be aware of these new qualifying events in order to accommodate and communicate with employees. Like all Section 125 qualifying events, it is optional for employers to adopt these newly recognized events. Employers have the choice to limit employees’ election changes to open enrollment only; however choosing to adopt all permissible qualifying event standards would allow employees much greater flexibility.

In practice, it is rare for an employer to restrict employees’ ability to make medical plan election changes to open enrollment alone. While it may provide ease in administration to process elections only once per year for all employees, this would not address the needs of employees. If employers opt to include these new allowances as would seem the popular choice, they should have their plan documents amended accordingly before the end of their 2015 plan years.

Christina Villecco is the Vice President of Legislation and Compliance for Heffernan Insurance Brokers, where she advises employers of their obligations under the Affordable Care Act and assists employers. 

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