From the Hotline: Section 125 Contributions and Mid-Year Enrollment

Question: We have an interesting situation with an employee and his family who are on an individual health plan and not covered by the company group health plan.  The wife is now pregnant and the individual plan does not cover pregnancy, so they would like to enroll on our health plan mid-year.  We checked with the carrier, and this would be allowable to the carrier.  If they do enroll mid-year, would they be able to have Section 125 pre-tax contributions under the cafeteria plan?

Answer: The cafeteria plan document governs whether, due to a status change, the participant (employee) may revoke his/her election during the plan year and make a new election for the remainder of the year. IRS regulations set forth a list of permissible change-in-status events, and provide examples of events and the election changes that would be consistent with the event. The employer’s cafeteria plan may adopt provisions that are less broad than the parameters permitted by the IRS regulations, but cannot go beyond the IRS parameters.

None of the IRS permissible change-in-status events would apply in the scenario you presented. Although a cafeteria plan may allow the participant (employee) to change elections in the event of certain changes under another group health plan (or under certain governmental plans such as Medicaid), changes under an individual health policy do not create a change-in-status event. The employer’s group health plan may allow the employee to add dependents mid-year, if in accordance with the group insurance policy, but that coverage change would be outside of the cafeteria plan.