Employers considering the look-back measurement method to identify full-time employees for purposes of the ACA’s employer shared responsibility mandate have expressed concern about the impact on employees who are treated as full-time for a stability period but experience a reduction in actual hours of service.
Locked-In Status. Employers recognize that these employees may prefer to drop employer-sponsored coverage upon the reduction in hours. But employers that want to avoid penalty exposure under the ACA must continue to make these employees eligible for coverage, because they are recognized as full-time. And because there is no loss of eligibility, the employees cannot make a voluntary decision to drop coverage in the middle of the year. There is no change in status that will support an election change under the existing 125 plan regulations. The employees are locked-in.
New Election Change. A recent notice from the IRS provides important relief from this problem by adding a new election-change event to the cafeteria-plan rules. An employee can now make a mid-year election to revoke health plan coverage (not including health FSA coverage) upon a reduction in hours of service, if the following conditions are satisfied:
- The employee has been in a full-time position and changes to a position that is reasonably expected to average less than 30 hours of service per week, even if that change does not result in a loss of health plan eligibility.
- The employee represents to the employer that the employee (and any related individuals who also lose coverage) intend to enroll in another plan that provides minimum essential coverage, with such coverage effective no later than the first day of the second month following the month in which coverage is dropped under the employer’s plan.
Intent to Enroll in Other MEC. The second of these two conditions narrows the relief a little more than had been hoped. There must be more than a mere change in employment status. But there may be several available coverage options that would satisfy this requirement, including enrollment in another employer-sponsored plan (e.g., a spouse’s plan), enrollment in an exchange policy, or enrollment in the non-exchange individual market. And employers are not required to verify that employees have actually obtained this other coverage. The employees must just provide a “reasonable representation” of their intent to enroll in other coverage.
Dropping Employer Coverage for Exchange Coverage. The same guidance also allows for an election to drop employer-sponsored covered in the middle of a year if the employee is eligible to enroll in exchange coverage (either because of a special enrollment period or the exchange’s annual enrollment period) and the employee intends to enroll in a qualified health plan through the exchange with coverage effective no later than immediately after the employer-sponsored coverage ends. Again, it is not necessary for the employer to verify that the employee has actually enrolled through the exchange, but the employer must obtain a “reasonable representation” from the employee that such coverage will be obtained.
One-Way Street. Although these new election changes are welcome relief, employees should be careful to understand that they represent a one-way street. If the conditions are satisfied, employees can elect to drop employer-sponsored coverage. But once they do so, they cannot get back into the employer’s plan until another permissible enrollment opportunity arises (e.g., open enrollment or a separate change-in-status event).
Optional. These election changes are optional. Employers are not required to implement them. But employers typically seek to make their cafeteria plans as employee-friendly as possible. And these election changes will generally be favorable to employees who want to drop their employer-sponsored coverage.
Amendment Timing. To add these new election-change rights to a cafeteria plan, an employer generally must amend the plan document by the end of the plan year in which the election changes are first available. But the election changes may be implemented for the 2014 plan year, and the amendment is not required until the end of the 2015 plan year.
The IRS’s guidance (Notice 2014-55) is available here.