The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.
By Cathryn A. Conrad, Esq., Paul G. Griesemer, Esq., Linda Lemel Hoseman, Esq., Lori W. Jones, Esq., Michael D. Lane, Esq., Richard J. Pautler, Esq., Ruth A. Streit, Esq., Mark S. Weisberg, Esq., and Patricia A. Winchell, Esq.
Thompson Coburn LLP, St. Louis, MO and Chicago, IL
On September 18, 2014, the Internal Revenue Service issued Notice 2014-55, which establishes two new change-in-status events for cafeteria plans. The new change-in-status events apply only to coverage under a group health plan that provides minimum essential coverage (within the meaning of the Affordable Care Act). Changes under health flexible spending accounts are specifically excluded.
Cafeteria plans (also known as flexible benefit plans or §125 plans) allow employees to pay for certain employer welfare benefits (such as health insurance premiums) on a pre-tax basis. In general, cafeteria plan elections must be irrevocable during a period of coverage — frequently a 12-month period of coverage that coordinates with the welfare benefit plan year.
The change-in-status rules provide specific exceptions to the irrevocable election rule. The existing change-in-status rules include events such as change in legal marital status, change in number of dependents, or change in employment status that affects eligibility under the underlying benefit plan. The two new change-in-status events are described below.
Reduction in Hours of Service
The first new change-in-status event applies to an employee who was expected to average at least 30 hours of service per week, but as a result of a mid-year employment change, is expected to average less than 30 hours of service per week. Such an employee may prospectively revoke his election for group health plan coverage during the year. The election change is allowed even if the reduction in hours does not cause the employee to lose eligibility under the underlying health plan.
There are two conditions that an employee must satisfy before the change is allowed:
The drop in coverage must correspond to the intended enrollment of the employee (including any dependents whose coverage would also be dropped) in other minimum essential coverage (such as a coverage through the exchange or another group health plan); and
The new coverage must be effective no later than the first day of the second month following the month that includes the date as of which coverage is dropped.
In applying the above rules, the plan administrator may rely on an employee's reasonable representation of the intended enrollment and the effective date of the new coverage.
Enrollment in Exchange Coverage
The second new status change event applies to an employee who is eligible to enroll in coverage through the exchange (during an exchange open enrollment or special enrollment period). Such an employee may prospectively revoke his election for group health plan coverage during the year.
There are two conditions to that an employee must satisfy before the change is allowed:
The plan administrator may rely on an employee's reasonable representation about the intended enrollment.
Employer Action Items
The plan administrator may rely on an employee's reasonable representation about the intended enrollment. The new status change events are optional. Plan administrators may allow such elections beginning September 18, 2014. However, the cafeteria plan must be amended to provide for such election changes. The amendment must be adopted on or before the last day of the plan year in which the elections are allowed. A special rule allows amendments effective in 2014 to be adopted no later than the end of the plan year beginning in 2015.
For more information, in the Tax Management Portfolios, see Raish, 397 T.M., Cafeteria Plans, and in Tax Practice Series, see ¶5940, Cafeteria Plans.
© 2014 Thomas Coburn LLP
Copyright©2015 by The Bureau of National Affairs, Inc.
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