Foster Swift Legal Update E-blast
April 28, 2020
Many employers sponsor a Code Section 125 cafeteria plan that allows eligible employees to pay for certain health and welfare benefits on a pretax basis. One foundational rule applicable to a cafeteria plan is that a participant’s benefit election may not be changed during the Plan Year unless an exception applies. As a result of the COVID-19 pandemic, many employers are facing an increase in the number of employees requesting mid-year changes to their cafeteria plan elections. We’ve listed below a summary of issues related to cafeteria plans that we’ve been discussing with clients. Some of these issues are related to the recently enacted Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, and others stem from the Governor’s recent stay-at-home order.
- Mid-year enrollment in Health and Cafeteria Plans. Mid-year enrollment in health and cafeteria plans is permitted only when the participant (and his or her spouse or dependents, as applicable) experience a qualifying event. Employment terminations and changes in coverage under another employer’s plan constitute qualifying events for purposes of this rule. For example, if an employee is covered on the health insurance policy maintained by his spouse’s employer and his spouse is terminated, he (and his spouse) may enroll in health coverage with his employer. Note that the Plan document may require the employee to provide notice of his spouse’s termination within a certain timeframe in order to permit the employee to enroll.
- Mid-year changes to Dependent Care Assistance Program (“DCAP”) elections. DCAP election changes may also be made mid-year after the occurrence of a qualifying event, including a significant cost change. This event generally applies in a DCAP context when a participant changes dependent care providers. For example, if an employee incurs a significant increase or decrease in qualified dependent care costs due to school or work closures, the employee may be permitted to change his or her DCAP election, if permitted by the plan document.
- Mid-year changes to Health Flexible Spending Account (“FSA”) elections. Mid-year Health FSA election changes may be made in very limited circumstances. The qualifying events that permit a Health FSA election change generally involve a loss of coverage and not simply a delay in coverage. For example, if an employee’s scheduled medical procedures are delayed until after the end of the Plan Year, he or she may forfeit the unspent amounts that he or she had contributed to a Health FSA for those procedures. Note that the Plan document may include a grace period or carry-over provisions to avoid this result.
- Changes to Health FSA Reimbursements. Certain Health FSA rules related to reimbursement and substantiation have recently been relaxed by the CARES Act. A Plan may now permit the pretax reimbursement of (i) over-the-counter drugs without a prescription; and (ii) menstrual products. A Plan amendment would be required to implement these changes.
- Changes to Claims Run-Out Periods. A cafeteria plan will generally require a participant to submit DCAP and Health FSA expenses for reimbursement during a certain timeframe following the end of the Plan Year in which they were incurred. This is referred to as the claims run-out period. There is no legal requirement related to the period of time during which a Plan may allow participants to submit claims for reimbursement of incurred expenses. Some Plans are looking to extend the typical March 31 deadline to provide more time to participants to submit those claims. A Plan amendment would be required to implement such an extension.
If your cafeteria plan does not currently permit any of the mid-year election change events described above, you may want to consider whether to amend your plan in light of the COVID-19 pandemic. Additionally, the CARES Act changes and potential run-out period extension may ease administration for your plan. Please contact Mindi Johnson or Julie Hamlet if you’d like to discuss any of these issues further:
Mindi M. Johnson...616.726.2252...firstname.lastname@example.org
Julie L. Hamlet...616.796.2515...email@example.com