While Section 125 plans seem basic on the surface, we find this to be one of the greatest areas of misunderstanding in benefit plans.  Almost all HR professionals are familiar with the basic qualifying life event rules of a Premium Only Plan, and the use-it-or-lose-it rules of a Medical Flexible Spending Account.  But there are still common questions about when an employee can add or drop coverage during the year, without the standard “life events”, as well as some interesting benefit design questions that are surprisingly governed by your Section 125 plan.

Sometimes the situations can get tricky.  How would you handle the following scenarios?

1. The owner of the company wants to make matching contribution into HSA accounts for everyone including herself, up to a set dollar limit. What requirements and limitations should she be aware of?
2. Your anniversary date is 5/1, but on 9/1 an employee wants to opt off your plan onto his spouse’s plan.  Assuming there has been no life event such as marriage, divorce, birth or death, what conditions would make this possible? 
3. You have a calendar year FSA plan with a large number of participants. On your 7/1 policy year anniversary, the company’s leadership decides to switch to a sole option High Deductible Health Plan strategy. What do you need to do for the 6 months until your FSA plan year ends?
4. You have a 10/1 plan but an employee wants to drop coverage 1/1 because they found a cheaper policy on the state or federal exchange.  Can he or she do so?

Scroll down for the answers:

1. First of all remember that HSA contributions tied to a match or to wellness incentives must be run through a Section 125 plan, subjecting it to non-discrimination and other requirements.  In this example, the owner can certainly make matching contributions to employees, but she herself, her immediate family (even if they are also employees), and anyone else who owns more than 2% of an LLC or S-Corporation may NOT participate. If the organization is a C-Corporation (including non-profits) or a government entity, there are no limitations on owners or key employees participating as long as discrimination tests are performed and passed.
2. There are two optional events which employers CAN choose to designate as qualifying events, but these must be written into your Section 125 Cafeteria plan document.  We also recommend writing them into your overall ERISA Wrap Plan Document and Summary Plan Description which govern your plans (if you don’t have one of these documents, let us know and we can help!). These two events are:  availability of other coverage (ie the open enrollment) such as that of another employer, a spouse, or a parent; and a significant change in the cost or coverage you are offering.  If the employer has made these two events available as qualifying events, the employee in question could drop coverage on 9/1 to take coverage with another job they have, or with a spouse or parent. 
3. Implementing an HDHP plan mid-way through your FSA plan year can be tricky if you don’t plan in advance for it. First of all, it should be communicated that anyone who made an FSA election, is bound by that election for the entire calendar year, even if they’ve used up the money before you make the plan change. In this case, where everyone is moving to the HDHP option since the company is choosing to eliminate other plans, this means that anyone who participated in the FSA that year may not contribute to an HSA account (or receive employer contributions) until the end of the FSA plan year. We recommend that the employer hold off on contributing for all employees until the start of the new year to avoid confusion, and perhaps consider a one-time contribution in the new year equal to some or all of what they would have contributed had the employees all been eligible.  We also recommend that if your FSA plan offers a rollover feature, that the rollover amounts be converted to a limited purpose FSA plan (for non-medical expenses only) so that employees can begin using the HSA accounts 1/1.  Finally, we’d recommend moving both the FSA plan year (if you’re keeping such a plan at all) to match your anniversary date of 7/1, as well as changing your deductible to run on your 7/1 policy year rather than calendar year, if your carrier will allow it.  (Incidentally, this same scenario is present for any employee changing benefits in a company with a dual option offering, if their medical plan year does not match their FSA plan year. Some employers think they have to have a 1/1 effective date to implement an HDHP/HSA plan for these reasons, but as long as you can match your deductible year up with the medical and FSA plan year, any plan anniversary will work just fine.)
4. Yes.  Since the issuing of IRS Notice 2014-55, there is now a new optional qualifying event for all Section 125 plans, allowing individuals to opt out if they purchase coverage in the state or federally-facilitated marketplaces, if the employer chooses to include this in their plan document.  They may only return to the group coverage, however, at your regular open enrollment period or with a traditional life event.  Please note that while they can drop coverage to enroll during the annual open enrollment period (typically including 1/1, 2/1, or 3/1 effective dates), they cannot drop coverage to go to the exchange at other times of the year unless they have another qualifying event.