Year-End Action Item: Section 125 Cafeteria Plan Amendments
- November 21, 2014
Employers that permit employees to pay for certain benefits, such as health coverage, on a pre-tax basis under an Internal Revenue Code Section 125 plan (also known as a “cafeteria plan”) may be required to make the following amendments to their cafeteria plans by December 31, 2014:
Windsor v. United States Changes. Following the Supreme Court’s 2013 decision in Windsor v. United States, employees are now permitted to pay for health coverage of same-sex spouses on a pre-tax basis, employees may be reimbursed from a health care flexible spending account (“FSA”) for eligible expenses incurred by same-sex spouses, and same-sex spouses may be treated as spouses under dependent care FSAs. To the extent same-sex spouses are covered, cafeteria plans that limit coverage to opposite-sex spouses should be amended by December 31, 2014 to reflect the Windsor decision.
Health care FSA Limit. Health care reform imposed a $2,500 limit (as indexed for inflation) on an employee’s annual salary reduction contributions to a health care FSA offered through a cafeteria plan. Although plans were required to operationally comply with this requirement effective for plan years beginning on and after January 1, 2013, plan documents must be amended to reflect the new limit by December 31, 2014.
In addition, the IRS recently announced that the health care FSA annual salary reduction contribution limit will increase to $2,550 for 2015. The $2,550 limit is a maximum limit and employers are not required to adopt the increase. Employers may choose whether to amend their plans by December 31, 2014 to permit an increased annual salary reduction contribution limit in 2015.
Optional $500 Carryover. Pursuant to guidance issued last year and subject to certain rules, cafeteria plans may (but are not required to) permit a carryover of up to $500 of unused health care FSA contributions to be applied to reimburse a participant’s eligible medical expenses in the subsequent year. Employers that choose to permit the $500 carryover must amend their plans by the last day of the plan year from which amounts may be carried over (e.g., calendar year plans must be amended by December 31, 2014 to permit carryovers into 2015). In addition, if an employer permitted carryovers from 2013 to 2014 under a special transition rule that did not require a plan amendment at the time, the plan also must be amended to reflect this change by December 31, 2014.
Optional New Mid-Year Election Changes. The IRS also recently issued guidance expressly permitting cafeteria plans to allow employees to prospectively revoke group health plan coverage mid-year in the event of two additional circumstances: (i) a reduction in an employee’s hours of service below 30 hours per week (even if there is no adverse effect on eligibility for coverage) if the revocation corresponds to the employee’s intended enrollment of the employee in another plan that provides minimum essential coverage; and (ii) the employee’s intended enrollment in a qualified health plan through the Health Insurance Marketplace during a Marketplace special enrollment period or open enrollment period. These additional mid-year changes are optional - cafeteria plans are not required to permit these election changes. If an employer decides to allow changes in these circumstances, cafeteria plans must be amended by the end of the plan year in which the changes are allowed. For 2014 only, plans that permit these changes must be amended by the last day of the 2015 plan year (e.g., December 31, 2015 for calendar year plans). However, if other changes are being made to a cafeteria plan pursuant to any of the bullets above, employers may decide to include this amendment with their other 2014 cafeteria plan amendments.