Question: What is the cafeteria plan tag-along rule, and how can employers offer it to facilitate mid-year employee and dependent enrollments?
Short Answer: The tag-along rule derives from the Section 125 permitted election change event rules to allow employees to enroll existing dependents mid-year upon experiencing a qualifying life event. Employers can also rely upon the tag-along rule to enroll the employee where necessary to facilitate a dependent’s mid-year enrollment.
General Rule: Section 125 Cafeteria Plan Irrevocable Election
Employees’ elections to pay the employee-share of the premium for health and welfare plan coverage on a pre-tax basis or make pre-tax FSA contributions are governed by Section 125 of the Internal Revenue Code. The Section 125 cafeteria plan rules are very strict when it comes to the irrevocability of employees’ elections.
That general rule under Section 125 is that all elections (including an affirmative or default election not to participate) must be:
a) made prior to the start of the plan year, and
b) 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 (e.g., marriage, divorce, birth, adoption, change in employment status affecting eligibility). 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:
HIPAA Special Enrollment Events: Overview
HIPAA special enrollment events are a subset of the Section 125 permitted election change events that provide employees with additional mid-year enrollment rights.
The following events qualify as HIPAA special enrollment events:
- Loss of eligibility for group health coverage or individual health insurance coverage;
- Loss of Medicaid/CHIP eligibility or becoming eligible for a state premium assistance subsidy under Medicaid/CHIP; and
- Acquisition of a new spouse or dependent by marriage, birth, adoption, or placement for adoption.
For more details: HIPAA Special Enrollment Events
HIPAA Special Enrollment Events: Existing Dependents
The HIPAA special enrollment rules limit the mid-year enrollment rights to the employee, the spouse, and any newly acquired dependents (e.g., newborn child). Any other dependents (e.g., siblings of the newborn child) are not entitled to special enrollment rights.
The exclusion of existing dependents from special enrollment rights, for example, prevents employees from having the right under HIPAA to add an existing child to the plan upon the birth of a new child.
The Tag-Along Rule: Cafeteria Plan Option for Existing Dependents
Beyond the required HIPAA special enrollment event rights, the Section 125 cafeteria plan permitted election change event rules allow employers to offer additional election change opportunities to employees. These permitted election change event rules are optional, but most employers intend to offer employees the ability to change their elections mid-year to the maximum extent allowable.
The so-called “tag-along” rule is a Section 125 provision that permits mid-year enrollment in a manner that applies more broadly than the HIPAA special enrollment rules. The tag-along rule is derived from the general “change in status” permitted election change event requirement that any mid-year election change be “on account of and corresponds with a change in status.” This concept is typically referred to as the “consistency rule” rule for change in status events.
The tag-along rule primarily permits employees to enroll existing dependents in the plan where the dependent enrollment satisfies the consistency rule. Although the tag-along rule is not explicitly referred to in the Section 125 regulations, examples in the rules and IRS commentary in the preamble to the regulations highlight the availability of the tag-along rule to accommodate mid-year enrollment of existing dependents.
The Tag-Along Rule: Examples of Situations Where it May Apply
There are many potential permitted election change event situations where the tag-along rule can apply to permit enrollment of additional individuals. The following is an overview of some of the more common examples.
Example #1: Enrolling Siblings Upon Birth of Child
- Bruce and Talia have a child Damian who is covered as a dependent through Talia’s plan with her employer.
- Bruce and Talia have a second child Thomas, and they would like to move the entire family to Bruce’s coverage.
- If the employer and carrier (or stop-loss) permit, Bruce can rely on the tag-along rule to enroll Damian (who as an existing dependent does not have a HIPAA special enrollment right) in Bruce’s plan.
Example #2: Enrolling Employee to Permit Enrollment of Dependent Who Lost Coverage
- Leto and Jessica have a child Paul, all of whom are enrolled in the medical coverage through Leto’s employer.
- Leto and Paul have no vision impairments, so they decline vision coverage.
- Jessica wears glasses and needs regular checkups, so she enrolls in employee-only vision coverage through her employer’s vision plan.
- Jessica loses her job and her vision coverage.
- If the employer and carrier permit (or stop-loss), Leto can rely on the tag-along rule to enroll himself (as needed to enroll a dependent) and Jessica in Leto’s vision plan.
Example #3: Changing Employee’s Coverage to Accommodate Dependent Who Changed Residence
- Jerry and Elaine have a child Cosmo who is moving from New York to Los Angeles to attend college.
- All three individuals are covered under a regional HMO through Jerry’s employer.
- Cosmo’s new residence is outside the regional HMO service area, and therefore the move causes him to lose coverage.
- If the employer and carrier (or stop-loss) permit, Jerry can rely on the tag-along rule to move both Cosmo (who experienced the event) and Jerry and Elaine (who have to change coverage to facilitate Cosmo’s new coverage) to a different plan option sponsored by the employer that provides coverage both in New York and Los Angeles.
Example #4: Enrolling Employee to Permit Enrollment of Dependent Moving to U.S.
- Rhett is married to Scarlett, but Scarlett resides outside the United States.
- Rhett declines coverage through his employer because he is enrolled in Medicaid, and Scarlett is not eligible because she does not reside in the U.S.
- Scarlett moves to the U.S. to reside with Rhett and needs health coverage.
- If the employer and carrier (or stop-loss) permit, Rhett can rely on the tag-along rule to enroll both Scarlett (who experienced the event) and himself (as needed to enroll a dependent) in Rhett’s employer-sponsored health plan.
Important Caveat #1: Insurance Carrier or Stop-Loss Provider Approval Required
Insurance carriers and stop-loss providers are not required to accommodate tag-along enrollments. Accordingly, employers processing a mid-year enrollment election change request based on the tag-along rule should first confirm that the insurance carrier (or stop-loss provider for a self-insured plan option) will accept the tag-along enrollment.
Important Caveat #2: Cafeteria Plan Terms
The Section 125 rules do not require the cafeteria plan to accommodate any mid-year changes to employees’ pre-tax elections. Accordingly, as with all aspects of the Section 125 permitted election change events, cafeteria plans are not required to offer tag-along enrollments.
Note: The HIPAA special enrollment rules do require the employer-sponsored major medical group health plan to accommodate certain mid-year enrollments.
Employers should consult the cafeteria plan document terms when determining whether their cafeteria plan is designed to accommodate the tag-along rule. If the plan terms do not directly address tag-along enrollment—as is frequently the case—the employer can use its discretionary authority to interpret those plan terms on a consistent basis to incorporate the tag-along rule.
The tag-along rule is a useful cafeteria plan option for employers to permit mid-year enrollment of additional individuals who do not have a HIPAA special enrollment right, including existing children who were not previously enrolled. It is also a useful cafeteria plan option for employers to allow employee enrollment or coverage changes to accommodate a permitted election change event experienced by the employee’s dependent.
Treas. Reg. §1.125-4(b)(2):
(i) Employer M provides health coverage for its employees pursuant to a plan that is subject to section 9801(f). Under the plan, employees may elect either employee-only coverage or family coverage. M also maintains a calendar year cafeteria plan under which qualified benefits, including health coverage, are funded through salary reduction. M's employee, A, is married to B and they have a child, C. In accordance with M's cafeteria plan, Employee A elects employee-only health coverage before the beginning of the calendar year. During the year, A and B adopt a child, D. Within 30 days thereafter, A wants to revoke A's election for employee-only health coverage and obtain family health coverage for A's spouse, C, and D as of the date of D's adoption. Employee A satisfies the conditions for special enrollment of an employee with a new dependent under section 9801(f)(2), so that A may enroll in family coverage under M's accident or health plan in order to provide coverage effective as of the date of D's adoption.
(ii) M's cafeteria plan may permit A to change A's salary reduction election to family coverage for salary not yet currently available. The increased salary reduction is permitted to reflect the cost of family coverage from the date of adoption. (A's adoption of D is also a change in status, and the election of family coverage is consistent with that change in status. Thus, under paragraph (c) of this section, M's cafeteria plan could permit A to elect family coverage prospectively in order to cover B, C, and D for the remaining portion of the period of coverage.)
Treas. Reg. §1.125-4(c)(4):
(i) Employee E is married to F and they have one child, G. Employee E's employer, U, maintains a cafeteria plan under which employees may elect no coverage, employee-only coverage, or family coverage under a group health plan maintained by U, and may make a separate vision coverage election under the plan. Before the beginning of the calendar year, E elects family health coverage and no vision coverage under U's cafeteria plan. Employee F's employer, V, maintains a cafeteria plan under which employees may elect no coverage, employee-only coverage, or family coverage under a group health plan maintained by V, and may make a separate vision coverage election under the plan. Before the beginning of the calendar year, F elects no health coverage and employee-only vision coverage under V's plan. During the year, F terminates employment with V and loses vision coverage under V's plan. Employee E now wants to elect family vision coverage under U's group health plan.
(ii) F's termination of employment is a change in status under paragraph (c)(2)(iii) of this section, and the election change satisfies the consistency rule of paragraph (c)(3) of this section. Therefore, U's cafeteria plan may permit E to elect family vision coverage (covering E and G as well as F) under U's group health plan.
In accordance with comments, examples in the regulations clarify that if, in accordance with special enrollment rights provided by HIPAA , an employee, spouse, or new dependent is entitled to enroll in a group health plan, a cafeteria plan may permit the employee to elect to enroll pre-existing dependents in the underlying group health plan. Likewise, the examples clarify that if, in accordance with the change in status rules relating to a new spouse or dependent, an employee is entitled to elect family coverage under a group health plan, then other family members are permitted to become covered under the family coverage as a result of the election change.
Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship. Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).
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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