The IRS has reiterated, in IRS Information Letter 2019-0028, that while a Section 125 cafeteria plan may allow participants to make a mid-year pre-tax contribution election change because of the occurrence of certain events (informally called change in status or qualifying events), the plan is not required to make this option available.
Background. Under IRS regulations a cafeteria plan may, by its provisions, permit participants to change their pre-tax contribution elections when certain events, including the following, occur:
- a change in the participant’s legal marital status, including marriage, death of a spouse, divorce, legal separation or annulment;
- a change in the number of the dependents, due to the birth, adoption, placement for adoption, or death of a dependent;
- a change in employment status of the participant, spouse or dependent if this affects eligibility for an employee benefit plan;
- a participant, spouse or dependent has a significant curtailment of coverage;
- a participant, spouse or dependent is eligible, during a special enrollment period or open enrollment, to enroll in health coverage through a Health Insurance Marketplace;
- a participant, spouse or dependent becomes eligible, or ineligible, for CHIP.
IRS Letter 2019-0028. The IRS noted that, generally, the terms of a cafeteria plan must provide that participants elect the amount of their pre-tax contributions before the beginning of the plan year (period of coverage), and that participants, generally speaking, cannot change their elections during the period of coverage. Nevertheless, “a plan may, but is not required to”, adopt provisions that allow an employee to revoke an election during a period of coverage, and to make a new election for the remaining period of coverage, if the participant experiences any one of certain specified events listed in IRS regulations, and the election change relates to the event.
However, the letter emphasizes that “[A] plan is not required to permit an employee to revoke or make a new election outside of the enrollment…. In addition, the plan must be operated in accordance with its terms” and cannot allow mid-year election changes if the plan document provisions do not provide such authorization.
IRS Letter 2019-0028 is available at: https://www.irs.gov/pub/irs-wd/19-0028.pdf