3506 / When can benefit elections under a cafeteria plan be changed?

Editor’s Note: IRS Notice 2022-41 changed the rules governing mid-year election changes and cafeteria plans in light of the final regulations that fixed the so-called “family glitch” under the ACA.   Typically, employees are not permitted to change the family coverage election mid-year.  Beginning January 1, 2023, however, a non-calendar year cafeteria plan may allow an employee to revoke an election for family coverage so that family members can enroll in ACA marketplace coverage if both of the following are true: (1) one or more of the employee’s family members are eligible to enroll in marketplace coverage during a special enrollment period or during Marketplace annual open enrollment, and (2) revoking the employee’s family coverage election corresponds with the intended enrollment of the family member in a marketplace plan.

The IRS provided relief to permit certain mid-year election changes in the wake of the COVID-19 pandemic. For mid-year elections made during calendar year 2020 or 2021, a Section 125 cafeteria plan could permit employees who are eligible to make salary reduction contributions under the plan to:

(1)     with respect to employer-sponsored health coverage, (a) make a new election on a prospective basis, if the employee initially declined to elect employer-sponsored health coverage; (b) revoke an existing election and make a new election to enroll in different health coverage sponsored by the same employer on a prospective basis; and (c) revoke an existing election on a prospective basis, provided that the employee confirms in writing that the employee is enrolled, or immediately will enroll, in other health coverage not sponsored by the employer; and

(2)     revoke an election, make a new election, or decrease or increase an existing election applicable to a health FSA or dependent care assistance program on a prospective basis.

If an employee had unused amounts remaining in a health FSA or a dependent care assistance program under the cafeteria plan at the end of a grace period or plan year ending in 2020 or 2021, the cafeteria plan could permit employees to apply those unused amounts to pay or reimburse medical care expenses or dependent care expenses incurred through 2021 or 2022, as applicable.¹ This relief was optional for employers.²

Typically, there are only certain instances when a cafeteria plan may permit an employee to revoke an election during a period of coverage and to make a new election relating to a qualified benefits plan.³