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When Mid-Year Coverage Changes Create a Mini-OE

Question: In what situations may employees change their health plan elections because of a mid-year change to the plan’s benefits?

Short Answer: A mid-year addition or improvement of a plan option, or a significant coverage curtailment or a plan option, will generally create a mini-OE permitting employees to change their elections.

Section 125 General Rule: Elections Irrevocable

That general rule under Section 125 is that employee health and welfare plan elections (including an affirmative or default election not to participate) to pay the employee-share of the premium 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.

Insurance carriers (and stop-loss providers for self-insured plans) generally follow the same Section 125 permitted election change event rules with respect to mid-year coverage change elections.

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.

Mid-Year Plan Change Creating Mini-OE: Addition or Improvement of a Plan Option

If the employer adds a new plan option mid-year, or significantly improves an existing plan option mid-year, the employees eligible for that new or significantly improved plan option experience a Section 125 permitted election change event.

Those employees may elect to revoke their existing election (including an affirmative or default election not to participate) and make a new election to participate in the new or significantly improved plan option on a prospective basis.  This is commonly referred to as a “mini-OE”.

Note that this event does not permit employees to change their election for other lines of coverage for which there is no new or significantly improved plan option.  Furthermore, this event does not permit a participating employee to drop coverage entirely.

Example 1:

  • Employer with a calendar plan year offers HDHP and HMO medical plan options.
  • Employer adds a new medical PPO plan option to its plan effective 8/1.

Result 1:

  • Employees who are enrolled in the HDHP or HMO plan options may change their election to the PPO plan option effective 8/1.
  • Employees who previously declined medical coverage may elect to enroll in the PPO plan option effective 8/1.
  • No other medical, dental, vision, health FSA, or other benefit election changes are permitted.

Mid-Year Plan Change Creating Mini-OE: Significant Curtailment of Coverage

If the employer significantly curtails (i.e., reduces) coverage under a plan option mid-year, the employees participating in that plan option experience a Section 125 permitted election change event.

Those employees may elect to revoke their existing election to participate in the plan option that is being significantly curtailed, and make a new election to participate prospectively in one of the other plans providing similar coverage (e.g., from one medical plan option to another medical plan option).   This is commonly referred to as a “mini-OE”.

The rules provide that a reduction in benefits qualifies as a significant coverage curtailment only if there is an overall reduction in coverage provided under the plan so as to constitute reduced coverage generally.  One example of a mid-year significant curtailment of coverage would be a significant cost-sharing increase (e.g., increased deductibles, copays or coinsurance), or loss of a major provider network under the plan.  An example of a mid-year change that would not qualify as a significant coverage curtailment would be loss of one particular physician in a network.

If the mid-year curtailment of coverage qualifies as a “loss of coverage,” the plan may also permit the participating employee to drop coverage entirely if no similar plan option is available.  “Loss of coverage” refers to the elimination of the plan option entirely, a substantial decrease in the medical care providers available under the plan option (such as a major hospital or group of physicians no longer being in-network), or a reduction in the benefits for a specific type of medical condition or treatment to which the employee or employee’s family is currently in a course of treatment.

Example 2:

  • Employer with a calendar plan year offers HDHP, HMO, and PPO medical plan options.
  • The PPO medical plan option loses a major provider network effective 8/1.

Result 2:

  • Employees who are enrolled in the PPO medical plan option may change their election to the HDHP or HMO plan option effective 8/1.
  • Employees who previously declined medical coverage or are enrolled in a different plan option cannot change their election.
  • No other medical, dental, vision, health FSA, or other benefit election changes are permitted.

Important Caveat: Carrier Approval

Although these mid-year plan change events create a permitted election change event (often referred to as a “mini-OE”) for the affected employees under Section 125, the employer should still confirm that the carrier (or stop-loss provider for a self-insured plan option) to which employees may move will accept the mid-year enrollment.  Insurance carriers (and stop-loss providers for self-insured plans) generally follow the same Section 125 permitted election change event rules with respect to mid-year coverage change elections.

No Health FSA Election Change Permitted

None of these mid-year plan change events (referred to broadly as “significant cost or coverage changes”) permit employees to change their health FSA election.

Important Reminder: SMM Requirement May Apply

Employers must provide a Summary of Material Modifications (SMM) or updated SPD to employees whenever there is a material change to the plan.

For full details, see our previous post: Distribution Timing Rules for SPDs and SMMs.

What About Mid-Year Contribution Changes?

Similar Section 125 permitted election change event rules apply where the employer imposes a mid-year significant cost change to the employee-share of the premium.

For full details, see our previous post: Mid-Year Contribution Changes to the Employee-Share of the Premium.

ABD Office Hours Webinar: Section 125 Cafeteria Plans.

Regulations

Treas. Reg. §1.125-4(f):

(f) Significant cost or coverage changes.

(1) In general. Paragraphs (f)(2) through (5) of this section set forth rules for election changes as a result of changes in cost or coverage. This paragraph (f) does not apply to an election change with respect to a health FSA (or on account of a change in cost or coverage under a health FSA).

(3) Coverage changes.

(i) Significant curtailment without loss of coverage. If an employee (or an employee’s spouse or dependent) has a significant curtailment of coverage under a plan during a period of coverage that is not a loss of coverage as described in paragraph (f)(3)(ii) of this section (for example, there is a significant increase in the deductible, the copay, or the out-of-pocket cost sharing limit under an accident or health plan), the cafeteria plan may permit any employee who had been participating in the plan and receiving that coverage to revoke his or her election for that coverage and, in lieu thereof, to elect to receive on a prospective basis coverage under another benefit package option providing similar coverage. Coverage under a plan is significantly curtailed only if there is an overall reduction in coverage provided under the plan so as to constitute reduced coverage generally. Thus, in most cases, the loss of one particular physician in a network does not constitute a significant curtailment.

(ii) Significant curtailment with loss of coverage. If an employee (or the employee’s spouse or dependent) has a significant curtailment that is a loss of coverage, the plan may permit that employee to revoke his or her election under the cafeteria plan and, in lieu thereof, to elect either to receive on a prospective basis coverage under another benefit package option providing similar coverage or to drop coverage if no similar benefit package option is available. For purposes of this paragraph (f)(3)(ii), a loss of coverage means a complete loss of coverage under the benefit package option or other coverage option (including the elimination of a benefits package option, an HMO ceasing to be available in the area where the individual resides, or the individual losing all coverage under the option by reason of an overall lifetime or annual limitation). In addition, the cafeteria plan may, in its discretion, treat the following as a loss of coverage—

(A) A substantial decrease in the medical care providers available under the option (such as a major hospital ceasing to be a member of a preferred provider network or a substantial decrease in the physicians participating in a preferred provider network or an HMO);

(B) A reduction in the benefits for a specific type of medical condition or treatment with respect to which the employee or the employee’s spouse or dependent is currently in a course of treatment; or

(C) Any other similar fundamental loss of coverage.

(iii) Addition or improvement of a benefit package option. If a plan adds a new benefit package option or other coverage option, or if coverage under an existing benefit package option or other coverage option is significantly improved during a period of coverage, the cafeteria plan may permit eligible employees (whether or not they have previously made an election under the cafeteria plan or have previously elected the benefit package option) to revoke their election under the cafeteria plan and, in lieu thereof, to make an election on a prospective basis for coverage under the new or improved benefit package option.

(6) Examples. The following examples illustrate the application of this paragraph (f):

Example (8).

(i) Employer P maintains a calendar year cafeteria plan that allows employees to elect employee-only, employee plus one dependent, or family coverage under an indemnity plan. During the middle of the year, Employer P gives its employees the option to select employee-only or family coverage from an HMO plan. P’s employee, J, who had elected employee plus one dependent coverage under the indemnity plan, decides to switch to family coverage under the HMO plan.

(ii) Employer P’s midyear addition of the HMO option is an addition of a benefit package option. Under paragraph (f) of this section, Employee J may change his or her salary reduction contributions to reflect the change from indemnity to HMO coverage, and also to reflect the change from employee plus one dependent to family coverage (however, an election of employee-only coverage under the new option would not correspond with the addition of a new option). Employer P may not permit J to change J’s health FSA election.


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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