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Passive Enrollments with Rolling Elections

Question:  What are the Section 125 cafeteria plan election rules surrounding an employer’s passive enrollment?

Short Answer: With appropriate communication, employers may offer passive enrollments where employees’ elections automatically roll to the next plan year absent an affirmative election.

Section 125 General Elections Rule

That general rule under Section 125 is that employee health and welfare plan and FSA elections (including an affirmative or default election not to participate) to make employee contributions on a pre-tax basis through the cafeteria plan must be:

  • Made prior to the start of the plan year; and
  • Irrevocable for the plan year unless the employee experiences a permitted election change event.

Note: Special relaxed election change rules may apply in 2020 related to the COVID-19 pandemic.  See here for more details.

For full details, see our ABD Office Hours Webinar: Section 125 Cafeteria Plans.

For a summary of the permitted election change events, see our ABD 2020 Section 125 Permitted Election Change Event Chart.

Election Options for Newly Eligible Employees

Employers have two options for how to offer election choices to newly eligible (including eligible new hire) employees:

  • Affirmative elections; or
  • Automatic enrollment (default elections).

Affirmative elections are the standard approach where the employee must opt-in to coverage by electing to enroll in the health and welfare plan and pay the associated employee-share of the premium on a pre-tax basis through the Section 125 cafeteria plan.  Employees who take no action will not be enrolled.

Automatic enrollment treats an employee’s failure to act as a default election to enroll in certain health and welfare plan option(s) and pay the associated employee-share of the premium on a pre-tax basis through the Section 125 cafeteria plan.  Employers utilizing default elections should follow several procedural protections to prevent inadvertent enrollments.

Note that automatic enrollment approaches potentially implicate state wage withholding law concerns.  For more details, see our previous post: Automatic Enrollment Elections.

Election Options at Open Enrollment for Ongoing Eligible Employees

Employers have two options for how to offer election choices at open enrollment for ongoing eligible employees:

  • Affirmative elections; or
  • Passive enrollment (rolling elections).

Affirmative elections are the standard approach where the employee must opt-in to coverage by electing to enroll in the health and welfare plan and pay the associated employee-share of the premium on a pre-tax basis through the Section 125 cafeteria plan.  Employees who take no action will not be enrolled.

Passive enrollments provide that employees’ existing health and welfare plan elections for the current plan year—including to pay the associated employee-share of the premium on a pre-tax basis through the Section 125 cafeteria plan—will automatically roll to the next plan year if the employee takes no action.  Employees wishing to change their health and welfare plan elections (e.g., to waive or change plan options) must affirmatively elect such changes at open enrollment.

Employers utilizing a passive enrollment structure should clearly communicate the rolling election feature to employees at each open enrollment (typically through a ben admin system), including the following content:

  • A general description of the rolling election process;
  • The employee-share of the premium for each plan option;
  • The procedures for declining coverage;
  • The OE deadline to make an alternative election (i.e., to a different pan option other than the current election, or to waive);
  • A statement that the election (affirmative or rolling) will be irrevocable for the plan year unless the employee experiences a permitted election change event; and
  • A list of the employee’s existing elections.

Passive Enrollment Generally Limited to Medical, Dental, Vision

All Section 125 cafeteria plan elections for health and welfare benefits can be handled via a passive enrollment.  That includes medical, dental, vision, health FSA, dependent care FSA, and HSA elections.

However, most employers offering passive enrollment will limit the rolling election feature to the medical, dental, and/or vision plan benefits.  It is uncommon and generally not best practice for an employer to extend rolling elections to the health FSA, dependent care FSA, or HSA.

With respect to the health FSA and dependent care FSA, rolling elections generally are not advisable because of the use-it-or-lose-it rule.  Employers will want employees to be certain that they are consciously committing to their contribution election to avoid potential forfeitures.  Furthermore, the health FSA salary reduction contribution limit is indexed for inflation and therefore will often increase for the subsequent plan year.

With respect to HSAs, rolling elections are not common primarily because HSA elections depend on the employee’s continuing HSA eligibility.  The employee will need to elect to enroll in the HDHP again for the subsequent plan year to remain HSA-eligible.  HSA elections therefore cannot roll where an employee moves to a non-HDHP plan option.  Furthermore, the HSA contribution limit is indexed for inflation and therefore will often increase for the subsequent plan year.

ABD Office Hours Webinar: Section 125 Cafeteria Plans.

Regulations

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).


About the author

Brian Gilmore

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.


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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