Important Change to Cafeteria Plans Issued by IRS

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The Affordable Care Act (“ACA”), or “Obamacare” if you prefer, is still in its infancy, still causing wide-spread confusion, and is still changing. In September, the IRS issued proposed amendments to the Regulations associated with Cafeteria Plans (a/k/a Section 125 Plans).

[Author’s Note: For those unfamiliar with Cafeteria Plans, it is an employee benefit plan allowing employees to choose from a menu of benefits to develop a plan best suited to their needs. These benefits can include health and other insurances, cash benefits, and/or retirement plan contributions. The best feature of Cafeteria Plans is that that these benefits may be deducted from an employee’s pay on a pre-tax basis if the plan is properly established. These plans are not available to an owner of a business with greater than 2% ownership in that business.]

In IRS Notice 2014-55, the most significant change for small businesses is the treatment of those employees wanting to discard their employer-sponsored health plan for a plan on the Health Insurance Marketplace exchange. The IRS described two specific situations, and created the proposed amendments to address them:

  • The first scenario deals with the situation involving an employer dropping an employee’s weekly hours under 30 so that the employee is no longer considered full-time under ACA, but can still be covered by the employer’s plan under the covenants of the plan document. The numbers of companies doing this is startling.
  • The second scenario involves an employee who would like to opt out of the employer-sponsored plan in favor of a plan on one of the Excahnges without losing or duplicating coverage.

The IRS Notice amends the Regulations to allow an employee covered under a Cafeteria Plan to drop their employer-sponsored coverage in favor of enrolling in an Exchange-based plan. Previously, this was not allowed outside specified enrollment periods. In addition, this amendment further allows employers to modify their plan document to permit employees to revoke their employer-sponsored coverage for an Exchange-based plan.  

The bottom line to this gobbledy-gook is that if an employee either desires to be covered under an ACA-based plan or discovers that an ACA-based plan better suits their individual needs, they can now do so without gaps in coverage or paying for two plans.

Expect many more changes to come.