General Rules

1. The rules described in this document are found in the Section 125 regulations and IRS Notice 2014-55. Section 125 of the Internal Revenue Code governs cafeteria plans and the elections made under cafeteria plans to make pre-tax contributions for benefits on a salary reduction basis. Section 125 does not directly apply to other plans sponsored by an employer, such as medical, dental and vision plans. When an employee requests a coverage change under another plan, the terms of that plan govern whether an employee or dependent can enroll or disenroll mid-year (i.e., outside of initial or open enrollment). Section 125 and the rules described in this document govern the separate but related issue of whether the employee can make mid year changes to their pre-tax salary reduction elections.
2. In most cases, a cafeteria plan is not required to allow any pre-tax election changes.* This is true even if law requires the underlying health plan to allow mid-year enrollment changes (e.g., HIPAA special enrollment). A cafeteria plan may be selective in which changes are allowed. However, it is unusual for a plan not to allow any mid-year election changes. If a cafeteria plan does allow changes, the plan document should list the situations in which mid-year election changes are allowed in their plans.*An exception applies for HSA contributions. If employees can make pre-tax HSA contributions through the cafeteria plan, they must be allowed to change their HSA elections on at least a monthly basis
3. Election changes, if allowed, must be implemented on a prospective basis. In other words, coverage should be effective after the election change is requested – except for birth or adoption, for which pre-tax election changes made as a result of a HIPAA special enrollment in the medical plan must be effective retroactively. However, even for birth or adoption, payment for retroactive coverage must come from income not currently available at the time of the election change. There is also an exception that allows an initial election by a new employee to be effective retroactively if made within the first 30 days of employment.
4. A participant’s change to their elections for legitimate changes in status must satisfy a consistency rule, which generally means the change must be “on account of and corresponding with a change in status that affects eligibility for coverage.”
5. There is no general IRS rule prescribing a period of time by which election changes must be requested. However, changes should not be allowed so long after the event that the election is not “on account” of the event. Most plans designate a specific time frame within which the Plan Administrator must be informed of an event to make a pre-tax election change. Note paragraph number 6 of these General Rules.
6. Cafeteria plan terms can require election changes to be requested within a specified period, and employers are generally required to enforce any such deadline contained in the cafeteria plan. Note: HIPAA provides that a group medical plan must give individuals a minimum amount of time (typically 30 days) following a HIPAA special enrollment event to request enrollment in the plan. The amendments to HIPAA due to the American Reinvestment and Recovery Act of 2009 (ARRA) require a 60-day notice period after the loss of eligibility for Medicaid or Children’s Health Insurance Program coverage or a gain of eligibility for a State Children’s Health Insurance Program for a subsidy of employer-provided coverage.
7. There is a special rule for group-term life insurance and disability coverage. Participants may be allowed to increase or decrease group-term life insurance and disability coverage due to any status change. However, unless permitted under the master group policy, increases in coverage will likely be subject to underwriter approval or evidence of insurability.

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