Mid-year mini open enrollment events part 2: Significant health plan coverage changes

Question: When can a mid-year change in health plan coverage create a mini open enrollment opportunity?

Short answer: The Section 125 cafeteria plan rules provide that when a health plan option is added, significantly improved, or significantly curtailed mid-year, employees may have a corresponding ability to change their health plan election.

This is the second in a two-part series addressing mid-year mini open enrollment events.

Mid-year changes in health plan coverage

Employers generally attempt to maintain stable health plan coverage throughout the plan year, with any modifications typically communicated at open enrollment for implementation in the following plan year. However, employers generally retain the discretion to change health plan coverage terms at any point. There are some situations where a mid-year health plan modification is unavoidable, such as a change in law, insurance carrier-driven change, new state insurance mandates for fully insured plans, vendor changes, or severe budgetary issues.

The Section 125 cafeteria plan rules accommodate these possibilities by allowing employees to make a corresponding mid-year election change when a health plan option is added, significantly improved, or significantly curtailed mid-year.

Mid-year addition or significant improvement of a health plan option

The Section 125 cafeteria plan rules permit employees to change their health plan election mid-year if the employer adds a new health plan option, or if an existing health plan option is significantly improved. This effectively creates a restricted mid-year mini open enrollment event for affected employees. The mini open enrollment event doesn't permit employees to revoke their health plan election entirely or make any other election changes.

Employees enrolled in a different health plan option: May move to new or improved plan

Upon the introduction of a new or significantly improved health plan option mid-year, employees who are enrolled in a different health plan option may prospectively change their election to the new or improved plan.

Example 1:

• Camelot Corp. offers employees HMO and PPO options in a calendar plan year.
• During open enrollment, Arthur enrolls in the PPO plan option with $350/month pre-tax salary reduction contributions through the Section 125 cafeteria plan.
• In July, the company introduces a new HDHP plan option available at $250/month.

Result 1:

• Assuming the company’s Section 125 cafeteria plan and carrier/stop-loss permit the change, the addition of the new HDHP creates a mid-year permitted election change event.
• Arthur may change his election in July to the new HDHP plan option at the $250/month contribution rate.

Employees not enrolled in health plan: May enroll in new or improved plan

Upon the introduction of a new or significantly improved health plan option mid-year, employees who aren't enrolled in the health plan may prospectively change their election to the new or improved plan option.

Example 2:

• Round Table, Inc. offers employees an HMO health plan in a calendar plan year with $200/month pre-tax salary reduction contributions through the Section 125 cafeteria plan.
• During open enrollment, Galahad waives the health plan.
• In July, the company introduces a new EPO plan option available at $275/month.

Result 2:

• Assuming the company’s Section 125 cafeteria plan and carrier/stop-loss permit the change, the addition of the new EPO creates a mid-year permitted election change event.
• Galahad may change his election in July to enroll in the new EPO plan option at the $275/month contribution rate, even though he previously waived the health plan at open enrollment.

Employees already enrolled in improved plan: No election change available

The only election change available upon the introduction of a new or significantly improved health plan option mid-year is to elect that new/improved plan. Where the event is a new plan option, all eligible employees can change their election. However, where the event is an improved plan option, only those employees not currently enrolled in that plan option experience a permitted election change event. Those already enrolled in the improved plan option can't move to a different plan.

Example 3:

• Logres Logistics offers employees HMO, PPO and HDHP options in a calendar plan year, with the employee-share of the premium paid on a pre-tax basis through the Section 125 cafeteria plan.
• Percival waives the health plan at open enrollment.
• Gawain enrolls in the PPO plan option at open enrollment at a $315/month contribution rate.
• Lancelot enrolls in the HDHP plan option at open enrollment at a $240/month contribution rate.
• In July, the company decreases the HDHP post-deductible coinsurance rate from 30% to 15%.

Result 3:

• Assuming the company’s Section 125 cafeteria plan and carrier/stop-loss permit the change, the significant improvement of the HDHP creates a mid-year permitted election change event.
• Percival (waived) and Gawain (PPO) may change their election in July to enroll in the newly improved HDHP at the $240/month contribution rate.
• Lancelot (HDHP) can't change his election because he is already enrolled in the significantly improved plan option.

What is a significant improvement of a health plan option?

The IRS doesn't provide any clear guidance as to what constitutes a significant coverage improvement that triggers the ability to change health plan options. In an example in the regulations (Example 1 in Treas. Reg. §1.125-4(f)(6)), the IRS highlights that certain cost-sharing reductions can qualify as significant. No specific amount of the decrease is stated. The example merely provides that the plan reduces co-payments for office visits mid-year by an amount which constitutes a significant benefit improvement. Employers should therefore apply their best judgment to determine whether mid-year improvements are significant based on all relevant facts and circumstances.

Mid-year significant curtailment of a health plan option

The Section 125 cafeteria plan rules permit employees to change their health plan election mid-year if the employer significantly curtails (i.e., reduces) coverage mid-year. This effectively creates a restricted mid-year mini open enrollment event for the affected employees. The scope of the mini open enrollment event depends on whether the rules consider the curtailment to be a loss of coverage.

Significant curtailment without loss of coverage: Ability to move to other health plan option

Where the employer significantly curtails coverage under a health plan option mid-year without causing a loss of coverage, 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 another 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. The mini open enrollment event doesn't permit employees to revoke their health plan election entirely or make any other election changes.

A reduction in benefits qualifies as a significant coverage curtailment only if there's an overall reduction in coverage provided under the plan so as to constitute reduced coverage generally. Examples of mid-year reductions that may qualify as a significant curtailment of coverage include a significant cost-sharing increase or the loss of a provider network. By contrast, the loss of one particular physician in a network generally doesn't constitute a significant curtailment.

Example 4:

• Camelot Corp. offers employees HDHP and PPO options in a calendar plan year.
• During open enrollment, Arthur enrolls in the HDHP plan option with $250/month pre-tax salary reduction contributions through the Section 125 cafeteria plan.
• Galahad enrolls in the PPO at open enrollment at a $350/month contribution rate.
• Percival waives the health plan at open enrollment.
• In July, the company increases the HDHP post-deductible coinsurance rate from 15% to 30%.

Result 4:

• Assuming the company’s Section 125 cafeteria plan and carrier/stop-loss permit the change, the significant curtailment of the HDHP creates a mid-year permitted election change event.
• Arthur may change his election in July from the significantly curtailed HDHP to the PPO plan option at the $350/month contribution rate.
• Galahad (PPO) and Percival (waived) may not change their elections because they aren't affected by the HDHP coverage curtailment.

Significant curtailment with loss of coverage: Ability to waive only if no other plan option available

The mini open enrollment opportunity created by a significant curtailment that constitutes a loss of coverage adds the ability to waive coverage entirely where no other similar coverage is available, such as where the employer’s health plan offers only one medical, dental, or vision plan option.

The Section 125 rules define a loss of coverage to include four types of mid-year curtailments:

• Complete loss of coverage: This includes elimination of a health plan option, or an HMO ceasing to be available in the area where the individual resides.
• Substantial decrease in providers: Where there's a substantial decrease in the medical care providers available under a health plan option, including a major hospital losing network status or a substantial decrease in the physicians participating in a network or HMO.
• Reduction in coverage for a specific condition: A reduction in benefits for a specific type of medical condition or treatment for which the employee or covered family member is currently in a course of treatment for that specific condition.
• Other similar fundamental losses of coverage: Consider all relevant facts and circumstances.

Example 5:

• Round Table, Inc. offers employees a health plan with one option (a PPO) in a calendar plan year with $325/month pre-tax salary reduction contributions through the Section 125 cafeteria plan.
• During open enrollment, Gawain enrolls in the PPO.
• In July, the PPO loses a major hospital system and has a substantial decrease in the physicians participating in the preferred provider network.

Result 5:

• The company determines that the network changes causing a substantial decrease in medical care providers are sufficient to constitute a loss of coverage under the health plan.
• Assuming the company’s Section 125 cafeteria plan and carrier/stop-loss permit the change, the significant curtailment with loss of coverage creates a mid-year permitted election change event.
• Gawain may change his election in July to waive the health plan because no other similar coverage is available.

Example 6:

• Logres Logistics offers employees HMO, EPO and HDHP options in a calendar plan year, with the employee-share of the premium paid on a pre-tax basis through the Section 125 cafeteria plan.
• The HMO is available with a $310/month contribution rate, the EPO at $375/month and the HDHP at $240/month.
• Lancelot enrolls in the HMO plan option at open enrollment.
• In July, the company eliminates the HMO plan option.

Result 6:

• Assuming the company’s Section 125 cafeteria plan and carrier/stop-loss permit the change, the significant curtailment with loss of coverage creates a mid-year permitted election change event.
• Lancelot may not waive the health plan mid-year because other similar coverage is available.
• Lancelot may change his election in July from the eliminated HMO to either the EPO or HDHP.
• Even though the other coverage available is a different type of health plan and at a different cost, it is still considered similar coverage for purposes of the Section 125 cafeteria plan election change rules.

Health FSA election changes aren't permitted

The mini open enrollment event created by a significant coverage 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 coverage change event 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.

Important caveat 1: Insurance carrier or stop loss provider approval

Although a mid-year coverage change may create a permitted election change event under Section 125, insurance carriers and stop loss providers aren't required to accommodate all coverage change election requests. Accordingly, employers processing a mid-year election change request based on a significant coverage 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 significant coverage 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 change in coverage events, the employer may use its discretionary authority to interpret those 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