f Cafeteria plan document should define “significant cost change” for purposes of mid-year elections

 

Cafeteria plan document should define “significant cost change” for purposes of mid-year elections
Issue:

Your company offers a Code Sec. 125 cafeteria plan, but you have closed enrollment on your employees’ health insurance until 2015. Members can only join the plan mid-year at initial eligibility or with a qualifying life event — such as a significant change in coverage, including a significant cost increase. Several of your employees’ spouses have requested to join your plan due to large premium increases for coverage from their employer. You have historically defined a “significant cost increase” as the complete removal of an employer’s contribution. In this instance, the other employer’s plan does not have any employer contribution, but the premium will double. Your gut reaction is to let them on the plan. Would this violate Code Sec. 125?
Answer:    

This appears to be a qualifying cost and coverage change. However, the IRS does not specifically define a "significant cost change” — that term is supposed to be defined in the plan document. If the plan document will have to be modified to allow this kind of mid-year election, note that IRS regulations state the following:

“Change in coverage under another employer plan. 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 another employer plan (including a plan of the same employer or of another employer) if the other cafeteria plan or qualified benefits plan permits participants to make an election change that would be permitted …”

Source: Internal Revenue Code Sec. 1.125-4(f)(4).
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