Opt-Out Credits for Temps/Interns
By Brian Gilmore | Published April 6, 2018
Question: Does an employer need to provide the opt-out credit to eligible full-time temps/interns who waive coverage? If the temp/intern stays on and is moved to regular full-time status, will he have another chance to elect benefits?
Compliance Team Response:
Do We Need to Offer Coverage to Full-Time Temps/Interns Under the ACA Employer Mandate Pay or Play Rules?
The general rule is an ALE will need to offer coverage to a full-time temp or intern who remains employed on the first day of a fourth full calendar month to avoid potential ACA employer mandate pay or play penalties.
See our full discussion here for more details: https://theabdteam.com/blog/medical-coverage-summer-interns-2/
Opt-Out Credit Must Be Available to Eligible Temps/Interns
Opt-out credits are governed by Section 125 of the Internal Revenue Code. In order to meet the Section 125 nondiscrimination rule standards, the opt-out credit will need to be offered to all full-time employees eligible for the plan—regardless of whether they are full-time temps/interns.
Not offering the opt-out credit to full-time temps/interns who are eligible for benefits would risk losing the tax-advantaged status of plan contributions for all of the company’s highly compensated participants (generally those making at least $120k in the prior year). Treating any non-highly compensated full-time participant differently by not offering the opt-out credit to eligible temps/interns would likely violate the Section 125 nondiscrimination rules.
See our full discussion here for a longer summary of the Section 125 nondiscrimination rules as they relate to employer contributions: https://theabdteam.com/blog/nondiscrimination-rules-for-different-health-plan-contribution-structures/
No Permitted Election Change Event Upon Move from Eligible Temp/Intern Status to Regular Full-Time (Unless Change in Eligibility)
An employee experiences a Section 125 permitted election change event upon a change in employment status only if that change in employment status affects the employee’s eligibility for plan benefits.
In this case, it appears that the full-time temp/intern is already eligible for all lines of coverage. Therefore, there will be no change in plan eligibility upon changing status to regular full-time. That means the employee will not be able to change elections until the next open enrollment period (or, if earlier, upon experiencing a different permitted election change event).
For more details on when employees can make mid-year election changes, see our Section 125 Permitted Election Change Event Chart.
Prop. Treas. Reg. §1.125-7(c):
(c) Nondiscrimination as to contributions and benefits.
(1) In general. A cafeteria plan must not discriminate in favor of highly compensated participants as to contributions and benefits for a plan year.
(2) Benefit availability and benefit election. A cafeteria plan does not discriminate with respect to contributions and benefits if either qualified benefits and total benefits, or employer contributions allocable to statutory nontaxable benefits and employer contributions allocable to total benefits, do not discriminate in favor of highly compensated participants. A cafeteria plan must satisfy this paragraph (c) with respect to both benefit availability and benefit utilization. Thus, a plan must give each similarly situated participant a uniform opportunity to elect qualified benefits, and the actual election of qualified benefits through the plan must not be disproportionate by highly compensated participants (while other participants elect permitted taxable benefits). Qualified benefits are disproportionately elected by highly compensated participants if the aggregate qualified benefits elected by highly compensated participants, measured as a percentage of the aggregate compensation of highly compensated participants, exceed the aggregate qualified benefits elected by nonhighly compensated participants measured as a percentage of the aggregate compensation of nonhighly compensated participants. A plan must also give each similarly situated participant a uniform election with respect to employer contributions, and the actual election with respect to employer contributions for qualified benefits through the plan must not be disproportionate by highly compensated participants (while other participants elect to receive employer contributions as permitted taxable benefits). Employer contributions are disproportionately utilized by highly compensated participants if the aggregate contributions utilized by highly compensated participants, measured as a percentage of the aggregate compensation of highly compensated participants, exceed the aggregate contributions utilized by nonhighly compensated participants measured as a percentage of the aggregate compensation of nonhighly compensated participants.
Prop. Treas. Reg. §1.125-7(e)(2):
(2) Similarly situated. In determining which participants are similarly situated, reasonable differences in plan benefits may be taken into account (for example, variations in plan benefits offered to employees working in different geographical locations or to employees with family coverage versus employee-only coverage).
Prop Treas. Reg. §1.125-7(m)(2):
(m) Tax treatment of benefits in a cafeteria plan.
(1) Nondiscriminatory cafeteria plan. A participant in a nondiscriminatory cafeteria plan (including a highly compensated participant or key employee) who elects qualified benefits is not treated as having received taxable benefits offered through the plan, and thus the qualified benefits elected by the employee are not includible in the employee’s gross income merely because of the availability of taxable benefits. But see paragraph (j) in §1.125-1 on nondiscrimination rules for sections 79(d), 105(h), 129(d), and 137(c)(2), and limitations on exclusion.
(2) Discriminatory cafeteria plan. A highly compensated participant or key employee participating in a discriminatory cafeteria plan must include in gross income (in the participant’s taxable year within which ends the plan year with respect to which an election was or could have been made) the value of the taxable benefit with the greatest value that the employee could have elected to receive, even if the employee elects to receive only the nontaxable benefits offered.
Treas. Reg. §1.125-4(c):
(c) Changes in status.
(1) Change in status rule. A cafeteria plan may permit an employee to revoke an election during a period of coverage with respect to a qualified benefits plan (defined in paragraph (i)(8) of this section) to which this paragraph (c) applies and make a new election for the remaining portion of the period (referred to in this section as an election change) if, under the facts and circumstances—
(i) A change in status described in paragraph (c)(2) of this section occurs; and
(ii) The election change satisfies the consistency rule of paragraph (c)(3) of this section.
(iii) Application to other qualified benefits. [Reserved]
(2) Change in status events. The following events are changes in status for purposes of this paragraph (c):
(i) Legal marital status. Events that change an employee’s legal marital status, including the following: marriage; death of spouse; divorce; legal separation; and annulment.
(ii) Number of dependents. Events that change an employee’s number of dependents, including the following: birth; death; adoption; and placement for adoption.
(iii) Employment status. Any of the following events that change the employment status of the employee, the employee’s spouse, or the employee’s dependent: a termination or commencement of employment; a strike or lockout; a commencement of or return from an unpaid leave of absence; and a change in worksite. In addition, if the eligibility conditions of the cafeteria plan or other employee benefit plan of the employer of the employee, spouse, or dependent depend on the employment status of that individual and there is a change in that individual’s employment status with the consequence that the individual becomes (or ceases to be) eligible under the plan, then that change constitutes a change in employment under this paragraph (c) (e.g., if a plan only applies to salaried employees and an employee switches from salaried to hourly-paid with the consequence that the employee ceases to be eligible for the plan, then that change constitutes a change in employment status under this paragraph (c)(2)(iii)).
(iv) Dependent satisfies or ceases to satisfy eligibility requirements. Events that cause an employee’s dependent to satisfy or cease to satisfy eligibility requirements for coverage on account of attainment of age, student status, or any similar circumstance.
(v) Residence. A change in the place of residence of the employee, spouse, or dependent.
(vi) Adoption assistance. For purposes of adoption assistance provided through a cafeteria plan, the commencement or termination of an adoption proceeding.
(3) Consistency rule.
(i) Application to accident or health coverage and group-term life insurance. An election change satisfies the requirements of this paragraph (c)(3) with respect to accident or health coverage or group-term life insurance only if the election change is on account of and corresponds with a change in status that affects eligibility for coverage under an employer’s plan. A change in status that affects eligibility under an employer’s plan includes a change in status that results in an increase or decrease in the number of an employee’s family members or dependents who may benefit from coverage under the plan.
Lead Benefits Counsel, VP, Newfront
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 on LinkedIn