Change in Status

This is meant to be an overveiw and any particular situation that may occur should be discussed with TaxSaver.

The Final Regulations

The new Final regulations include a two-pronged test to determine whether an election change can be permitted. There must first be a change in status event. Second, the requested change in election must be consistent with that event.

The new regulations contain Six (6) categories within which an event must fall, and also provide detailed guidance relating to the consistency requirement. If the change in status does not fall into one of the categories, the event will not qualify as a change in status.

Five Categories of Change in Status Events.

• Change in Employee's Legal Marital Status
• Change in Number of Tax Dependents
• Changes in Employment Status
• Dependent Satifies (or ceases to Satisfy) Dependent Eligibility
• Change in Residence of the employee, Spouse, or Dependent
• Adoption Assistance

This is an exhaustive list. Events that do not fit within one of the six categories will no longer qualify as a change in status. Do not forget that there are other events that would still permit a mid-year election change. This grouping effects qualified plan coverage and Flexible Spending Accounts

• HIPAA special enrollments and Section 125 Plans. Changes can be made for health coverage to the extent required by HIPAA special enrollment events. The change can also be made retroactive to the extent required by HIPAA.
• Judgment, decree or order due to divorce, annulment, legal separation or QMCSO will allow an election change to add or drop coverage consistent with the order. The change in election to add coverage applies to any dependent child that meets the IRC 152 definition of a dependent.
• Entitlement to Medicare or Medicaid would allow a change to cancel existing coverage. Also, the loss of entitlement to either program would allow a participant to add health coverage.
• COBRA continuation coverage with respect to the Employer's Plan, payment for the continuation coverage will be allowed on a pre-tax basis. An example might be if an employee went from full-time to part-time and lost eligibility or a dependent child reaches a limited age under the plan. the COBRA rule does not apply to pre-tax contributions for COBRA coverage under another employer's plan.

Additional circumstances where one may be able to revoke a pre-tax election are listed below. These circumstances DO NOT affect Health Spending Account elections. In other words, a qualifying change in this group would not allow a participant in a Heath Spending Account to make a change.

• Changes in cost of a plan with automatic salary adjustments
• Significant Curtailment of Coverage
• Changes in coverage under the plan of the employer of a spouse or dependent.
• Addition or elimination of a benefit package option
• FMLA leave

The Consistency test If a change in status occurs, employees are allowed to make a change consistent with the event. This applies to all qualified benefits (accident or health coverage and group term life). The proposed regs also apply the consistency requirement to Dependent Care and Adoption Assistance benefits. The question, under the consistency test, is whether the election change is on account of and corresponds with a change in status event that affects coverage eligibility of the employee, spouse or dependent under an employer's plan.

For example, if there is a loss in eligibility of coverage for a dependent due to divorce, death or if a dependent ceases to satisfy the eligibility requirements for coverage, then the employee can cancel coverage for only the affected dependent. If an employee, spouse or dependent gains eligibility for coverage under another employer's plan as a result of a change in marital status or change in employment status, an employee's election under the plan to cease or decrease coverage for that individual under the plan corresponds with that change in status only if coverage for that individual becomes effective or is increased under the other employer's plan.

Special Consistency Rule for Life or Disability Coverage If a change in status is a change in the employee's marital status or a change in the employment status of the employee's spouse or dependents, an election to increase or decrease group term life or disability coverage must correspond with that change in status. This can occur even if the requested change does not track the increase or decrease in family size, or result in a gain or loss of eligibility.

The Thirty Day Rule

A thirty day safe harbor exists for employees who terminate and rehire in the same plan year. The rule requires that any employee who returns within 30 days must reinstate their old elections. Anyone rehired after 30 days may make new elections with no strings attached

The Proposed Regulations - Cost or Coverage Changes

Change in Status as it applies to DCAP and Adoption Assistance The cost or coverage proposed rules will probably take care of most changes requested for Dependent Care. Also, the new proposed regulations have been extended to apply to DCAP and adoption assistance plans. The consistency requirement is satisfied if either; (1) the election change is on account of and corresponds with a change in status that affects eligibility for coverage under an employer's plan; or (2) the election change is on account of and corresponds with a change in status that affects eligibility of dependent care or adoption assistance for tax exclusion available under IRC 129 or 137. For example, if a child turns 13 mid-year, and is no longer a qualifying dependent, the employee can cancel coverage. The proposed rules do not pertain to the Health FSA.

The 1989 proposed regulations allowed for a change in employee elections if there were a change in cost or coverage, but they limited application of the rule to health plan coverage provided by an "independent, third-party provider." The IRS interpreted this rule narrowly limiting its application to insured indemnity and HMO arrangements. Under this prior IRS interpretation, sponsors of self-funded plans were generally prohibited from passing on mid-year cost increases. Now, self-funded plans (other than health FSAs) can take advantage of the cost change rules.

Changes in Cost The new proposed regulations provide that a plan can require an automatic election increase that corresponds to an increase or decrease in the cost of coverage. Moreover, if there is a significant cost increase, a plan may allow participants to either make a corresponding election increase or elect alternative coverage. If there is no alternate plan available, the employee may drop coverage.

Special rule for dependent care Cost motivated election changes are allowed, except where the caregiver is a relative. If a dependent care provider increases the monthly fee, the participant can increase his or her salary reduction election accordingly to reflect the new fee. However, the proposed regulations specifically provide that a change in cost of coverage by a dependent care provider that is a relative (as defined in Code §§ 1 52(a)(l )-(8)) will not allow an election change. This definition of "relative" would preclude cost increases by most individuals related by blood or marriage but not unrelated tax dependents who reside with the employee.

This rule would not preclude an employee from changing providers mid-year to a relative and then increasing or decreasing their contribution accordingly. This would be a coverage change and not a cost change.

Change in Coverage

If the coverage under a plan is significantly curtailed or ceases during a period of coverage, the cafeteria plan may permit affected employees to revoke their elections under the plan. Employees "may" make a new election for coverage under another benefit package option providing similar coverage. If a new benefit is added, employees can rethink their elections and opt in or stay with their current election. For those who previously declined, it appears that they could now enter.

Additionally, the new coverage change rules allow for election changes in the event that a newly-added option is made available or an existing benefit option is eliminated. The new proposed regulations provide that coverage under an accident or health plan is significantly curtailed "only if there is an overall reduction in coverage provided to participants under the plan so as to constitute reduced coverage to participants generally."

Change in coverage of spouse or dependent under employer's plan- no more "Election Lock"!

A cafeteria plan may permit an employee to make a prospective election change that is on account of and corresponds with a change made under the plan of the spouse's, former spouse's or dependent's employer if: (1) a cafeteria plan or qualified benefits plan of the spouse's, former spouse's, or dependent's employer permits participants to make an election change that would be permitted under the proposed and final regulations; or (2) the cafeteria plan permits participants to make an election for a period of coverage that is different from the period of coverage under the cafeteria plan or qualified benefits plan of the spouse's, former spouse's, or dependent's employer. Under either option, a consistency requirement must be satisfied, since the new election must be on account of and correspond to the change under the plan of the spouse's, former spouse's, or dependent's employer.

This rule addresses the election-lock issue where an employee and spouse or dependent may be covered under cafeteria plans with different election periods, due to different periods of coverage or other reasons. No health FSA change is allowed due to this provision.