Mid-year mini open enrollment events part 1: Change to the employee-share of the health plan premium

Question: When can a mid-year change to the employee-share of the health plan premium create a mini open enrollment opportunity?

Short answer: The Section 125 cafeteria plan rules provide that when employers initiate a significant cost change mid-year, employees may have a corresponding ability to change their health plan election.

General rule: Section 125 cafeteria plan irrevocable election

Employees’ elections to pay the employee-share of the premium for health plan coverage on a pre-tax basis are governed by Section 125 of the Internal Revenue Code. The general election rule under Section 125 is that all elections must be:

1. Made before the start of the plan year, and
2. Irrevocable for the plan year unless the employee experiences a Section 125 permitted election change event.

The permitted election change events are set forth in Treas. Reg. §1.125-4. Most cafeteria plans provide a window of 30 days for an employee to make a mid-year election change upon experiencing a permitted election change event.

For more details:

• Section 125 Cafeteria Plan Guide
• Section 125 Permitted Election Change Event Chart

What is a mini open enrollment event?

The benefits industry generally uses the term mini open enrollment to refer to events that give rise to a significant portion of the employee population being permitted to change their health plan election mid-year. This is in contrast to the much more common change in status permitted election change events (e.g., marriage, divorce, birth, adoption, change in employment status affecting eligibility, change in residence affecting eligibility) that are limited to a specific employee’s life event.

The most common forms of mini open enrollment events are:

• Mid-year changes to the employee-share of the premium (part I); and
• Mid-year significant coverage changes (part II)

The Section 125 cafeteria plan rules apply differently to these broader cost or coverage change events than the individualized change in status events. This series explores how mid-year changes to the health plan’s cost or coverage can create mini open enrollment opportunities for affected employees.

Mid-year change to the employee-share of the premium

While employers typically keep the health plan contribution rates consistent throughout the plan year, employers generally retain the discretion to change the health plan contribution structure at any point. The Section 125 cafeteria plan rules accommodate this possibility by allowing employees to make a corresponding mid-year election change where the cost change is significant.

Mid-year significant cost changes to the employee-share of the premium

The Section 125 cafeteria plan rules permit employees to change their health plan election mid-year if the employee-share of the premium for a health plan option significantly increases or decreases during the plan year. This effectively creates a restricted mid-year mini open enrollment event for affected employees.

Significant cost increase: Employees may move to a different health plan option

Where the employer significantly increases the employee-share of the premium mid-year, employees enrolled in that plan option may change their election to a different health plan option providing similar coverage. For these purposes, similar coverage means any other plan option in the same category of benefits (e.g., a different medical, dental, or vision plan option), whether offered by that employer or available through a family member’s employer-sponsored plan.

Example 1:

• National Soccer Supplies, Inc. offers employees HMO, PPO and HDHP options in a calendar plan year.
• During open enrollment, Christian elects the HMO plan option with $250/month pre-tax salary reduction contributions through the Section 125 cafeteria plan.
• In July, the company increases the employee-share of the HMO premium to $350/month.

Result 1:

• Assuming the company’s Section 125 cafeteria plan and carrier/stop-loss permit the change, the significant increase in the HMO cost of coverage creates a mid-year permitted election change event.
• Christian may change his health plan election in July to either the PPO or the HDHP plan option.
• He could also move to coverage through another employer (e.g., spouse’s plan), if available.
• Christian can't revoke (drop) his health plan election entirely because the company offers other health plan options — even though the PPO and HDHP are of a different type and may be more expensive.

Significant cost increase: Employees may revoke health plan election only if no other option is available

Employees may drop their health plan election entirely upon a significant cost increase if no other plan option providing similar coverage is available, such as where the employer’s health plan offers only one medical, dental, or vision plan option. This approach isn't available if the employer offers any other type of health plan option in the same category (e.g., medical, dental, vision), even if that other plan option is of a different type (e.g., HMO, PPO, HDHP) or different cost.

Example 2:

• Local Soccer Supplies, Inc. offers employees a health plan with one plan option (a single HMO) in a calendar plan year.
• During open enrollment, Weston enrolls in the health plan with $250/month pre-tax salary reduction contributions through the Section 125 cafeteria plan.
• In July, the company increases the employee-share of the premium to $350/month.

Result 2:

• Assuming the company’s Section 125 cafeteria plan and carrier/stop-loss permit the change, the significant increase in the cost of coverage creates a mid-year permitted election change event.
• Weston may revoke his health plan election in July because the employer offers no other similar coverage.

Significant cost decrease: All eligible employees may enroll in reduced-cost plan option

Where the employer significantly decreases the employee-share of the premium mid-year, the rules provide that all employees eligible for the affected plan option may change their election to enroll in the reduced-cost offering. This includes employees who are currently enrolled in a different plan option not subject to the cost change, as well as employees who previously declined enrollment in the health plan.

Example 3:

• Regional Soccer Supplies, Inc. offers employees HMO and HDHP options in a calendar plan year.
• At open enrollment, the employee-share of the premium for both plan options is $250/month.
• Sergino enrolls in the HMO plan option at open enrollment.
• Tyler declines the health plan at open enrollment, finding both options too expensive.
• In July, the company decreases the employee-share of the HDHP premium to $150/month.

Result 3:

• Assuming the company’s Section 125 cafeteria plan and carrier/stop-loss permit the change, the significant decrease in the cost of coverage creates a mid-year permitted election change event.
• Sergino may change his health plan election in July from the HMO to the HDHP plan option.
• Tyler may enroll in the HDHP in July even though he waived the health plan at open enrollment.

What is a significant cost change?

The IRS doesn't provide any clear guidance as to what amount or degree of a cost change is significant enough to trigger the option to change health plan options. Employers may be familiar with the similar analysis (with similarly scarce guidance) as to whether a mid-year health plan benefit change is material for purposes of the ERISA SMM requirements. In that case, employers should apply their best judgment to determine whether a cost change is significant under all the relevant specific facts and circumstances for purposes of these Section 125 election change requirements.

In a different context for dependent care FSA purposes, an example in the regulations provides that a childcare provider cost increase from $4,000 to $4,500 over the course of the year is a significant cost increase, allowing the employee to increase the election. The $500 increase over the course of the year represents a monthly cost increase of roughly $40/month or roughly 12%. Although the example doesn't involve health coverage, it is often referenced to reasonably suggest that even relatively modest cost increases may satisfy the significant cost change standard. Employers should nevertheless evaluate each situation based on its specific facts and circumstances.

Health FSA election changes aren't permitted

The mini open enrollment event created by a significant cost change never includes the ability for the employee to change their health FSA election. Even where an employee is changing plan options, the rules related to a significant cost change explicitly provide that health FSA election changes aren't available.

This is in contrast to the change in status events (e.g., marriage, divorce, birth, adoption, change in employment status affecting eligibility, change in residence affecting eligibility), which do allow health FSA election changes that are on account of and correspond with the event.

Mid-year cost changes that aren't significant: Automatic election changes

As discussed above, even relatively modest mid-year cost changes may qualify as significant and therefore create a restricted mini open enrollment opportunity for affected employees. However, where the employer makes a mid-year change to the employee-share of the premium that isn't significant, the rules provide that the cafeteria plan may automatically map the affected employees’ elections to the new amount.

The employer’s ability to map employees’ elections to a mid-year cost change applies regardless of whether the change is an increase or decrease to the employee-share of the premium. The employer can simply continue taking the required employee-share of the premium at the newly adjusted levels on a reasonable and consistent basis to reflect the insignificant cost change.

Example 4:

• International Conglomerate Soccer Supplies, Inc. offers employees HMO, EPO, PPO and HDHP options in a calendar plan year.
• During open enrollment, Antonee elects the HDHP plan option with $250/month salary reduction contributions through the Section 125 cafeteria plan, and Folarin elects the EPO plan option at $300/month.
• In July, the company decreases the employee-share of the premium for the HDHP to $245/month, and it increases the EPO contribution to $305/month.

Result 4:

• The company determines that the HDHP and EPO cost changes aren't significant for purposes of the Section 125 cafeteria plan rules, which means there's no mid-year permitted election change event.
• Antonee’s salary reduction contribution election for the HDHP automatically maps to reflect the lower $245/month rate as of July, with no ability to change plan options.
• Folarin’s salary reduction contribution election for the EPO automatically maps to reflect the higher $305/month rate as of July, with no ability to change plan options.
• Employees enrolled in other plan options and those who previously waived the health plan also may not change their elections.

Potential concern with automatic election increases: State wage withholding laws

A potential concern with automatically mapping an employee’s election to a higher health plan premium is that many state wage withholding laws require employees to expressly authorize payroll deductions in writing. For example, California law generally prohibits wage deductions without the employee’s written authorization.

ERISA expressly preempts state laws that relate to employee benefit plans. The extent to which such preemption applies in this context isn't entirely clear. Nevertheless, it appears ERISA may preempt the application of such state wage withholding laws with respect to automatic, insignificant health plan election increases because they relate to an ERISA-covered health plan. Supporting that position is DOL guidance (e.g., Advisory Opinion 2008-02A) finding that preemption applies in the context of automatic health plan enrollment, and certain court decisions finding preemption in the context of recovering health plan premium underpayments (e.g., Jackson v. Wal-Mart Stores, Inc.).

Important caveat 1: Insurance carrier or stop loss provider approval

Although a mid-year change to the employee-share of the premium may create a permitted election change event under Section 125, insurance carriers and stop loss providers aren't required to accommodate all cost change election requests. Accordingly, employers processing a mid-year election change request based on a significant cost change should first confirm that the insurance carrier or stop-loss provider will accept the requested enrollment, change in coverage, or termination of coverage, as applicable.

Important caveat 2: Cafeteria plan terms

Employers processing a mid-year election change request based on a cost change should first consult the cafeteria plan document terms to confirm that the plan accommodates the request. If the plan terms don't directly address cost change events, the employer may amend the plan or use its discretionary authority to interpret the plan terms on a consistent basis. Although most cafeteria plans are designed to permit election changes to the maximum extent permitted, the Section 125 rules don't require the cafeteria plan to accommodate mid-year changes.

Separately, HIPAA special enrollment rules require employer-sponsored major medical group health plans to accommodate certain mid-year enrollments.

Summary