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Small Business Employee Benefits and HR Blog

Mid-Year Changes in Salary Reduction Elections for 2014 - New Rules

November 27, 2013
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This article provides an overview of mid-year changes in salary reduction elections, and what is changing for 2014.salary reduction election form midyear

Overview of Mid-Year Salary Reduction Elections and the ACA

Traditionally with Section 125 Cafeteria Plans, employees must elect a salary reduction agreement before the start of the plan year and cannot change their election during the plan year, unless there is a qualifying life event and the employer allows such a change. 

In the January 2, 2013 Federal Register, the IRS provided proposed regulations that included a transition rule for employee health coverage under a Cafeteria Plan with a non-calendar plan year. The proposed regulations noted the transition rule applied to applicable large employers. The Treasury Department and the IRS recently released Notice 2013-71 that clarifies the transition rule, which applies to an employer's Cafeteria Plan with a non-calendar plan year beginning in 2013 — regardless if the employer is an applicable large employer.

What this means is that an employee with coverage under a non-calendar plan could change their Cafeteria Plan (salary reduction) election. For example, an employee could stop his mid-year election for the group health plan coverage to purchase a subsidized individual plan from the Marketplace.

New Rules for Mid-Year Changes in Salary Elections

The new provisions permit employers to amend one or more of their Cafeteria Plan documents to allow mid-year salary reduction elections, even though an individual may not have experienced a life status event.

An employer may amend its plan to allow employees to make one or both of these salary reduction changes through a non-calendar cafeteria plan on a prospective basis:

  1. Change or revoke his or her election for accident and health plan coverage one time during the plan year; and/or

  2. Make a one-time prospective election for accident and health coverage if the employee failed to make an election before the non-calendar plan began in 2013.

The employer's Cafeteria Plan amendment may be more restrictive than the Notice guidance, but it may not be less restrictive. For example, an employer may limit the time period an employee may have to make the changes noted above instead of allowing the remainder of the plan year. These election changes are only permitted one time during the plan year and only apply to employees' accident and health coverage (i.e. not applicable to a health FSA).

Note: Before making any Cafeteria Plan document changes, an employer should check with its health insurance carrier(s) to ensure the carrier(s) will allow election changes without qualified life status events.

Photo Credit: Hubspot

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