On March 23, 2000, the Internal Revenue Service issued final and proposed regulations affecting the circumstances under which employees may make mid-year changes in elections under cafeteria plans.

The final regulations are effective for plan years beginning on and after January 1, 2001 and address the circumstances under which changes in elections may be made to accident & health and group term life coverage elections. The new proposed regulations address change in election rules applicable to all qualified benefits. The proposed regulations do not specify an effective date and any effective date will be prospective. However, until further guidance is issued, employer cafeteria plans may rely on the proposed regulations. Changes made by the final and proposed regulations are addressed below.

Employer plans that continue to rely on the old "Change in Family Status Rules" for accident & health and group term life elections will need to be amended to conform to the final regulations.

Employer plans that adopted the 1997 temporary regulations with regard to changes to accident & health and group term life coverage elections should at a minimum be modified to reflect changes in the expression of the Consistency Rule and special applications of the Consistency Rule. These plans should also consider whether to adopt any of the more liberal provisions of the final regulations with regard to group term life elections and employment-related change in status events.

All plans may, but are not required to, adopt the new proposed rules.

The final regulations make several changes to the former temporary regulations issued in late 1997 relating to accident & health and group term life coverage elections. In summary, these changes include:

• Changes to the manner in which "Consistency Rule" is expressed and special application of the Consistency Rule for accident and health coverage elections;
• Broadening of the Consistency Rule with respect to group term life elections to permit either a change to increase or decrease coverage in the event that the 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 dependent;
• Inclusion of all employment-related Change in Status events (such as termination of employment; a strike or lockout; a commencement of or return from an unpaid leave of absence; a change in worksite) into one Employment Status change category;
• Inclusion of a catch-all category under the Employment Status change category which permits changes in election for any other employment status change that results in a gain or loss of eligibility under an employer plan (for example, a switch from hourly to salaried); and
• The ability of an employee to add health coverage if the employee, spouse or dependent loses coverage under Medicare or Medicaid.

The proposed regulations make more sweeping changes that include the following:

• The Change in Status rules (formerly applicable only to accident & health and group term life coverages) are made applicable to elections for other qualified benefits;

• Addition of a specific Change in Status rule for Adoption Assistance – commencement or termination of adoption proceedings;
• A flexible "Consistency Rule" for Change in Status events involving qualified benefits other than accident & health and group term life coverage such as Dependent Care and Adoption Assistance;
• The change in cost or coverage rules under former proposed regulations that were applicable only to insured health plans and HMOs are made applicable to all benefits (including self-insured benefits) other than Health FSAs. These rules permit plans to provide for automatic changes in the amount of employee salary reductions in the event of a change in cost; permit an employee to increase his or her salary reduction or to revoke an election and to receive coverage under another option that provides similar coverage in the event of a significant coverage cost increase; and permit employees to revoke elections and elect coverage under another option providing similar coverage in the event of a significant coverage curtailment.

• A cafeteria plan can provide for automatic increases or decreases in employee salary reductions in the event of cost changes under a self-insured health plan;
• A cafeteria plan can permit an employee to increase his or her salary reduction in the event that a day-care provider significantly increases the cost (with the proviso that the provider is not a relative).

• Expansion of the former proposed cost or coverage change rules by: (1) allowing for an election change in the event a benefit option (such as an HMO) is newly available or eliminated; (2) permitting an employee to make a change under the cafeteria plan that corresponds to a change made by the spouse or dependent under his or her employer’s plan which is permitted by regulation; and (3) permitting an employee to make a change in election that corresponds with a change made by the spouse or dependent during that person’s open enrollment period, if that person’s plan has a different period of coverage.

• An employee covered under an indemnity plan could switch to a newly added HMO;
• A change in a dependent care provider is treated as an addition of a new option with regard to Dependent Care elections. Accordingly, if the provider changes during the course of a plan year, the employee may change his or her election to reflect the cost of the new provider.
• Employee elects family health coverage. Spouse’s employer, which formerly offered employee-only health coverage, adds family coverage as an option. Spouse elects the family coverage. Employee’s plan may allow the employee to drop family coverage because the change by the spouse to add coverage for the new family coverage option is permitted by the regulations.

Employee elected employee-only health coverage under his employer’s cafeteria plan that has a calendar plan year. Spouse has employee-only health coverage through spouse’s employer’s cafeteria plan with a plan year running from September 1 – August 31. During open enrollment, spouse declines health coverage for the upcoming plan year, effective September 1. Employee may add the spouse to health coverage effective September 1.