New Election Change Reasons under Section 125 Cafeteria Plans

AT A GLANCE

• The IRS will allow new election change reasons for health coverage under Section 125 cafeteria plans
• The guidance applies to elections effective on or after January 1, 2023

Summary

The IRS has expanded the application of the permitted change in status rules for health coverage under a Section 125 cafeteria plan. Notice 2022-41 addresses the situation in which, during a period of coverage, a plan participant may wish to revoke the employee’s election under the cafeteria plan for family coverage under a group health plan (other than a flexible spending arrangement (FSA)) to allow one or more family members to enroll in a Qualified Health Plan (Plan) through a Health Insurance Exchange (Exchange) in the individual market.
Under this notice, the employee will be able to elect out of family coverage and into self-only coverage under that health plan prospectively during a period of coverage, provided specific conditions are satisfied. The guidance in the notice is effective for elections effective on or after January 1, 2023.

What is the New Section 125 Cafeteria Plan Rule?

A non-calendar year cafeteria plan can be amended to allow prospective midyear election changes from family coverage to self-only coverage under a group health plan that is not a health FSA and that provides minimum essential coverage provided the following conditions are satisfied:

• One or more related individuals are eligible for a special enrollment period to enroll in a Qualified Health Plan (QHP) through an Exchange or one or more already-covered related individuals seeks to enroll in a QHP during the Exchange’s annual open enrollment period; and
• The election change corresponds to the intended QHP for new coverage beginning no later than the day immediately following the last day of the revoked coverage.

If the employee does not enroll in a QHP through an Exchange, the employee must elect self-only coverage (or family coverage including one or more already-covered related individuals) under the group health plan.

Cafeteria Plan Amendment

Amendments must be adopted on or before the last day of the plan year in which the elections are allowed, and the amendment may be effective retroactively to the first day of that plan year if the plan operates in accordance with the guidance and the employer informs participants of the amendment. However, amendments for a plan year that begins in 2023 can be adopted on or before the last day of the plan year that begins in 2024.

Next Steps

Employers and Plan Sponsors should work with their benefits broker to determine next steps if they are interested in adopting the new election change reason for their 2023 plan.

Thank you for choosing Paylocity as your Payroll Tax and HCM partner. This information is provided as a courtesy, may change and is not intended as legal or tax guidance. Employers with questions or concerns outside the scope of a Payroll Service Provider are encouraged to seek the advice of a qualified CPA, Tax Attorney or Advisor.