Section 125 Qualifying Events are Deceptively Tricky
Pre-tax elections made under a cafeteria plan are irrevocable for the period of coverage (typically for the plan year). In other words, an employee can’t ordinarily change the election made during their new hire or open enrollment midyear unless they experience some qualifying life event allowed under the rules.
The IRS’s election change rules recognize certain events that allow for midyear election changes. These events fall into three main groups:
Changes in status
Changes in cost or coverage
Changes from miscellaneous rules (e.g., COBRA, HIPAA, ACA, HSA rules, etc.) and court orders
Before looking closer at the deceptively complex events that allow participants to make midyear election changes, there are some key points to keep in mind:
The cafeteria plan doesn’t necessarily have to allow any midyear election changes. Instead, a plan could be designed to prohibit some or even all midyear pre-tax election changes (with considerations for HIPAA special enrollment rights and HSA rules).
However, if the plan allows midyear election changes, the plan must only permit the events allowed under IRS regulations and can’t offer more extensive change events than the ones recognized by the IRS.
Requested changes must be consistent with the event. In other words, the change must generally be as a result of a permitted event. There are special consistency rules for some events, but for others, the rules identify types of election changes (e.g., the type of coverage that can be changed, how it can be changed, and for whom) that are allowed when the event occurs.
Perhaps most important, there must be a written cafeteria plan in place in order to allow pre-tax salary reductions to begin with. The employer’s cafeteria plan must list out the events that allow for midyear election changes under Section 125. In other words, whenever there’s a question as to whether a certain event allows an employee to make a change, the employer should first reference the cafeteria plan document and follow what it says.