Questions about employer flexibility permitted under the guidance:
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For employers that consider permitting additional Section 125 cafeteria plan election changes, can the employee randomly pick their effective date?
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Under the additional Section 125 cafeteria plan guidance, can an employer allow new enrollments, but not permit plan to plan changes?
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Can employers allow new Section 125 cafeteria plan elections for only the healthcare FSA and the dependent care FSA account and not medical plan enrollments?
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Can employers limit the length of time they open this up to allow election changes, e.g., must be requested by 6/30/2020?
The additional flexibility provided in Notice 2020-29 is the maximum the plan is permitted to allow. It is our understanding that plans may more narrowly tailor any election change opportunities they offer to employees. In practice, this may mean many things, including among others:
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Plans opening election change “windows” versus at any time in the period
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Limiting the types or effective dates of such changes
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Who can make changes (e.g., allow new enrollees only, or only allow employees to change who are currently covered)
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Allowing changes to certain plans but not others. Note: Alight has seen strong interest from many employers interested in allowing changes to healthcare and dependent care FSAs. Employer interest in allowing changes to other plans, like the medical plan, has thus far been mixed as many employers are still considering options and the down-stream impacts of allowing those changes.
Employers should bear-in-mind “adverse selection” risks in allowing some or all of these changes so that they may avoid people changing their elections throughout the year to suit their evolving needs and avoiding paying premiums when they aren’t using the coverage. Employers with insured plans (or self-insured plans with stop-loss coverage) will want to discuss any potential changes with the applicable carrier(s) prior to adopting them in order to ensure that the carrier will accept the enrollment change given the insurance policy terms.
We also recommend that employers discuss any changes with legal counsel, plan consultants, and benefits record keepers before making any changes.
If the employer allows midyear election changes to the medical plan under the new Section 125 cafeteria plan guidance and the participant chooses to move from a higher cost, lower deductible plan to a lower cost, higher deductible plan, (e.g., non-HSA plan to an HSA-eligible plan) how would claims be impacted? Is there any guidance on this situation?
We are not aware of guidance directly on this type of election change (if permitted by the employer). In general, the coverage periods for each level of coverage would be expected to apply to claims incurred during each period, respectively. Along with the general issue of whether an insurance carrier (or stop-loss carrier for self-insured plans) will permit additional Section 125 election changes generally, employers will want to confirm whether prospective coverage would be granted “credit” for any amount of deductible paid under the prior coverage level with the applicable carrier and legal counsel.