Tough Times Lead to Rise in Cafeteria Plan Change Requests

When times are tough and it is increasingly difficult to pay the rent / mortgage and put food on the table, many benefits (health benefits, life insurance, etc.) elected under “cafeteria plans” (benefits purchased on a pre-tax basis) become luxuries, not necessities.  With rising costs of living and stagnant salaries, many employers are being faced with requests from employees to withdraw from cafeteria plan benefits during the plan year.  Seems simple enough, right?  A few standard forms and a call to your plan manager should do the trick?  Not so fast.

Under Section 125 of the Internal Revenue Code (and the regulations promulgated thereunder) cafeteria plans may allow employees to revoke an election during a period of coverage and make a new election for the rest of the period if a “change in status event” has occurred, and the election change is consistent with the event.  “Change in status events” include changes in marital status, employment status, number of dependents; instances where a dependent satisfies or ceases to satisfy eligibility requirements; and changes in residence.  To satisfy the “consistency rule,” the election change must be “on account of” and “correspond with” the change in status event that affects eligibility for coverage under the plan.  For instance, if an employee covered by medical under the plan gets married (and the new spouse has coverage available to the employee due to the marriage) the employee may only drop the plan if he/she does, in fact, elect coverage under the new spouse’s plan.

The regulations imply that an employer may rely on a “certification” by the employee that a “change in status event” has occurred when granting a plan change request.  While the regulations do not require that the certification be in writing, in practice it would be prudent to not only obtain a written certification, but to also require the employee to provide proof of the change event (marriage license, divorce decree, birth certificate, etc.).

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