At ANCO Insurance, we understand the complexities of managing your benefits and the importance of knowing when and how you can make changes to your elections. One key area that often raises questions is Section 125 midyear election changes. Let’s dive into what these changes can be used for and clarify why financial hardship does not qualify as a change event.
What is a Section 125 Plan?
A Section 125 plan, also known as a cafeteria plan, allows employees to pay for certain benefits on a pre-tax basis. These benefits can include health insurance premiums, dependent care assistance, and other qualified expenses. The primary advantage of a Section 125 plan is the tax savings for both employees and employers. However, this benefit comes with strict rules, especially regarding changes to elections during the plan year.
Midyear Election Changes: Qualifying Events
Once an employee makes a pre-tax election under a Section 125 plan, that election is typically irrevocable for the entire plan year. However, the IRS recognizes certain qualifying events that allow for midyear election changes. These events include:
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HIPAA Special Enrollment Rights:
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Acquisition of a new dependent through marriage, birth, or adoption.
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Loss of eligibility for group health coverage, CHIPS, or Medicaid.
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Change in Status:
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Change in marital status, number of dependents or employment status.
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Dependent satisfies or ceases to satisfy eligibility requirements.
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Change in residence affecting eligibility.
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Change in Cost of Coverage:
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Significant cost changes or coverage curtailment.
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Addition or significant improvement of benefit options.
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Change of Coverage Under Another Employer Plan:
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Loss of group coverage sponsored by a governmental or educational institution.
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Enrollment, or expected enrollment, in a Qualifying Health Plan (QHP) on the health insurance exchange.
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Enrollment, or expected enrollment, in minimum essential coverage after dropping below 30 hours of service a week.
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Court Judgment, Order, or Decree:
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This includes situations where a court orders coverage for a dependent child.
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Financial Hardship is NOT a Qualifying Event
A common misconception is that financial hardship can trigger a midyear election change under Section 125. Unfortunately, this is not the case. The IRS does not recognize financial hardship as a qualifying event for making changes to your elections. While it may seem logical that an inability to afford coverage should allow for changes, the regulations are clear that only specific events, as listed above, permit midyear changes.
Why Financial Hardship Doesn’t Qualify
The rules around Section 125 are designed to ensure consistency and compliance with tax laws. Allowing changes for financial hardship would undermine the pre-tax benefits structure and could jeopardize the plan’s status. The IRS is explicit in stating that the costs of coverage changes must be related to the plan itself, not the employee’s personal financial situation. Allowing changes due to personal financial difficulties would lead to administrative challenges and potential tax consequences for the plan and its participants.
Non-Pre-Tax Coverage
If your coverage is not paid on a pre-tax basis, then Section 125 rules do not apply. In such cases, changes may be made as long as the insurance carrier permits it, but this is contingent on the terms set by the carrier and the specific plan structure.
Understanding the limitations and allowances of Section 125 midyear election changes is crucial for maintaining compliance and avoiding penalties. At ANCO Insurance, we are committed to helping you navigate these complexities. While financial hardship is understandably a significant concern, it is not a recognized event for midyear changes under Section 125. Always ensure that your plan adheres to the specific qualifying events to protect its tax-advantaged status.
For more information or assistance with your Section 125 plan, feel free to contact ANCO Insurance. We’re here to help you manage your benefits effectively and ensure your plan remains compliant with all regulations.
