Question: What are the rules surrounding automatic enrollment of employees into the lowest-cost medical plan option at open enrollment or for new hires?
Compliance Team Response:
Section 125 Rules
Employers are permitted to automatically enroll employees in a health plan option that includes an employee contribution if they follow the Section 125 requirements for the process. These Section 125 rules are referred to as “automatic elections” or “default elections.”
This process requires:
- The employee receives a notice explaining the automatic enrollment process and the right to decline coverage (and avoid the associated employee-share of the premium);
- The notice must include the employee-share of the premium amount for employee-only and family coverage;
- The notice must include the procedures for declining coverage;
- The notice must include the OE deadline to make an alternative election (i.e., a different plan option than the default, or to waive entirely);
- The notice must state that the election will be irrevocable for the plan year unless the employee experiences a permitted election change event;
- The notice must be provided before every plan year; and
- For current employees, the notice must include a description of the employee’s existing coverage (if any).
It’s important to remember that this automatic enrollment approach could lead to cases where employees fail to read and/or act on the notice to decline coverage. Those employees will be automatically enrolled and locked into the default coverage under the standard irrevocable Section 125 election rule for the remainder of the plan year (unless they experience a permitted election change event).
Therefore, automatic enrollment is a crucial communications priority. The last thing any employer wants is upset employees stuck with an election they didn’t want because they failed to read and/or understand the materials—particularly if the default option is fairly expensive.
State Wage Withholding Laws
Employees generally must authorize any payroll reduction for an employee-share of the premium to comply with state wage withholding laws.
This authorization is typically handled by the employee making the election to participate in the plan, with the amount of the employee-share of the premium listed when making the election. The election thereby serves as a Section 125 cafeteria plan election (where applicable for pre-tax payment) and an authorization to satisfy the state wage withholding law requirements. However, there is no such election/authorization when an employee is automatically enrolled in the plan.
Nonetheless, the DOL has found in a 2008 opinion letter that ERISA will generally preempt state wage withholding laws requiring an affirmative election where an employee is automatically enrolled in coverage through a process meeting the Section 125 rules set forth above. For more information on ERISA preemption, see our previous FAST on the topic: https://theabdteam.com/blog/erisa-preemption-state-court-orders/
Prop. Treas. Reg. §1.125-2(b):
(b) Automatic elections.
(1) In general. For new employees or current employees who fail to timely elect between permitted taxable benefits and qualified benefits, a cafeteria plan is permitted, but is not required, to provide default elections for one or more qualified benefits (for example, an election made for any prior year is deemed to be continued for every succeeding plan year, unless changed).
(2) Example. The following example illustrates the rules in this paragraph (b):
Example. Automatic elections for accident and health insurance.
(i) Employer B maintains a calendar year cafeteria plan. The cafeteria plan offers accident and health insurance with an option for employee-only or family coverage. All employees are eligible to participate in the cafeteria plan immediately upon hire.
(ii) The cafeteria plan provides for an automatic enrollment process: Each new employee and each current employee is automatically enrolled in employee-only coverage under the accident and health insurance plan, and the employee’s salary is reduced to pay the employee’s share of the accident and health insurance premium, unless the employee affirmatively elects cash. Alternatively, if the employee has a spouse or child, the employee can elect family coverage.
(iii) When an employee is hired, the employee receives a notice explaining the automatic enrollment process and the employee’s right to decline coverage and have no salary reduction. The notice includes the salary reduction amounts for employee-only coverage and family coverage, procedures for exercising the right to decline coverage, information on the time by which an election must be made, and the period for which an election is effective. The notice is also given to each current employee before the beginning of each subsequent plan year, except that the notice for a current employee includes a description of the employee’s existing coverage, if any.
(iv) For a new employee, an election to receive cash or to have family coverage rather than employee-only coverage is effective if made when the employee is hired. For a current employee, an election is effective if made prior to the start of each calendar year or under any other circumstances permitted under §1.125-4. An election made for any prior year is deemed to be continued for every succeeding plan year, unless changed.
(v) Contributions used to purchase accident and health insurance through a cafeteria plan are not includible in the gross income of the employee solely because the plan provides for automatic enrollment as a default election whereby the employee’s salary is reduced each year to pay for a portion of the accident and health insurance through the plan (unless the employee affirmatively elects cash).
DOL Opinion Letter 2008-02A:
The Brochure explains that an employee who fails to make a medical coverage election, or certify that he or she has medical coverage from another source, will receive default coverage, which includes medical coverage under the SprintChoice Healthcare or SprintIndemnity Healthcare, and the Base Plus Plan option of the prescription drug program.
Consistent with the foregoing, it is the view of the Department that to the extent that section 337.060(1) of the Kentucky Revised Statutes is interpreted to limit, prohibit, or regulate deductions from wages for contribution to ERISA covered plans, it is preempted by section 514(a) of ERISA.
An employer can lawfully withhold amounts from an employee’s wages only: (1) when required or empowered to do so by state or federal law, or (2) when a deduction is expressly authorized in writing by the employee to cover insurance premiums, benefit plan contributions or other deductions not amounting to a rebate on the employee’s wages, or (3) when a deduction to cover health, welfare, or pension contributions is expressly authorized by a wage or collective bargaining agreement. Labor Code Sections 221 and 224. Although a wage garnishment is a lawful deduction from wages under Labor Code section 224, an employer cannot discharge an employee because a garnishment of wages has been threatened or if the employee’s wages have been subjected to a garnishment for the payment of one judgment. Labor Code Section 2929(a) (See How to file a discrimination complaint)
California Labor Code §224:
The provisions of Sections 221, 222 and 223 shall in no way make it unlawful for an employer to withhold or divert any portion of an employee’s wages when the employer is required or empowered so to do by state or federal law or when a deduction is expressly authorized in writing by the employee to cover insurance premiums, hospital or medical dues, or other deductions not amounting to a rebate or deduction from the standard wage arrived at by collective bargaining or pursuant to wage agreement or statute, or when a deduction to cover health and welfare or pension plan contributions is expressly authorized by a collective bargaining or wage agreement.
Nothing in this section or any other provision of law shall be construed as authorizing an employer to withhold or divert any portion of an employee’s wages to pay any tax, fee or charge prohibited by Section 50026 of the Government Code, whether or not the employee authorizes such withholding or diversion.
About the author
Lead Benefits Counsel
Brian Gilmore is the Lead Benefits Counsel at Newfront. He assists clients on a wide variety of employee benefits compliance issues. The primary areas of his practice include ERISA, ACA, COBRA, HIPAA, Section 125 Cafeteria Plans, and 401(k) plans. Brian also presents regularly at trade events and in webinars on current hot topics in employee benefits law. Connect with Brian on LinkedIn.
The information provided is of a general nature and an educational resource. It is not intended to provide advice or address the situation of any particular individual or entity. Any recipient shall be responsible for the use to which it puts this document. Newfront shall have no liability for the information provided. While care has been taken to produce this document, Newfront does not warrant, represent or guarantee the completeness, accuracy, adequacy, or fitness with respect to the information contained in this document. The information provided does not reflect new circumstances, or additional regulatory and legal changes. The issues addressed may have legal, financial, and health implications, and we recommend you speak to your legal, financial, and health advisors before acting on any of the information provided.
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