Section 125 Plans Generally Mean Irrevocable Elections
One of the most frequently asked questions to the WBCompliance team is about Section 125 Plans. That is, plans that fall under Section 125 of the tax code, known as “POP plans” (Premium Only Plans) and FSA Plans (Flexible Spending Accounts). Section 125 Plans are also sometimes referred to as “Cafeteria Plans.”
Many employers put POP plans in place so that employees can pay for their health benefits with pre-tax dollars, increasing their take-home pay and reducing the employer’s FICA taxes. If an employer has an FSA plan in place, its employees can set-aside pre-tax dollars at the beginning of an FSA plan year to pay for qualified expenses under Internal Revenue Code 213(d) – also increasing employee take-home pay, and reducing the employer’s FICA taxes. Because of the FSA’s pre-tax component, a POP is included (embedded) in an FSA.
Generally speaking, elections made under Section 125 Plans – both POPs and FSAs – are irrevocable and may not be changed during the plan year.
An employee paying for benefits on a pre-tax basis with a compliant POP plan, for example, cannot revoke her election for herself and/or her dependents, unless the revocation occurs at the POP or FSA renewal – or is a permitted change. This is why employers are always recommended to have their POP/FSA plan years coincide with their health plan years.
The Internal Revenue Service (IRS) provides specific instances when an employee can make midyear election changes or revoke an election entirely under a Section 125 Plan. These permitted changes in election events are stated IRS Notice TD 8921 as follows:
- Change in marital status
- Change in number of dependents
- Change in employment (e.g., termination/commencement, strike, lockout, return from unpaid leave, etc.)
- Change in dependent eligibility due to plan requirements (e.g., age limit reached, etc.)
- Change in residence (e.g., employee or dependent moves out of plan service area)
- Significant cost changes in coverage (increase or decrease)
- Significant reduction of coverage
- Addition or improvement to benefits package option
- Change in coverage of spouse or dependent under another employer plan (e.g., spouse’s employer had no insurance coverage before, but now offers a new plan)
- Loss of certain other health coverage (e.g., plans provided by governmental or educational institutions)
- HIPAA special enrollment right events
- Judgments, decrees or orders
- Entitlement to Medicare or Medicaid (gained or lost)
- Changes in average “hours of service” to less than 30 hours per week, if the employee and covered family members enroll in another plan providing minimum essential coverage (MEC) through a state Exchange.
If you want clarification on any of these points, reach us at firstname.lastname@example.org.