The Section 125 rules provide a list of “change in status” events, which allow certain midyear changes to an employee’s pre-tax election. These events encompass most change requests, but also have some of the most complex rules to follow. There are 5 categories of change in status events:
Change in legal marital status – These events include marriage, divorce, death of spouse, legal separation and annulment. Note, however, that eligibility under the plan must actually be lost as a result of legal separation (i.e., legal separation doesn't always mean a loss of eligibility under some plans).
Change in number of dependents – This include gain or loss of dependents due to birth, adoption, placement for adoption and death.
Dependent satisfies or no longer satisfies dependent eligibility requirements – This category causes a tax dependent to satisfy or no longer satisfy the requirements for coverage due to turning a certain age, gain or loss of student status, marriage, or similar situations.
Residence change – This is triggered when there’s a change in the place of residence of an employee, spouse, or dependent. An election change is allowed only when a change in residence affects the employee's eligibility for coverage. In other words, an employee couldn’t drop health coverage just because he or she moved, unless the employee becomes ineligible for coverage as a result of the move.
Change in employment status – If the change in employment status impacts eligibility under the plan, it will also qualify as a change in status event. This category includes any of the following events that change the employment status of the employee, the employee's spouse, or the employee's dependent:
start or termination of employment;
a strike or lockout;
going out on or return from an unpaid leave of absence; or
a change in worksite.
Also, if the change in employment status means that he or she becomes eligible or ineligible, then that change constitutes a change in employment.
A common question is whether a reduction in pay would allow a mid-year change. While certain events that qualify as a change in status event, such as a reduction in hours or job change, could result in less pay, a pay cut by itself typically will not be a change in status. In other words, a pay cut is not a change in employment status, unless the pay decrease affects plan eligibility, which is rare.
Change in status events are the basis for most election change requests, but can be quite complicated in practice. When an employee requests a change to their election midyear and one of these events seems to fit, it’s important to first review the cafeteria plan document and also to look closely at the rules before approving the request. To do otherwise risks disqualifying the entire cafeteria plan.