On March 23, 2000, the Internal Revenue Service (IRS) released the "Permitted Election Changes" (Treas. Reg. § 1.125-4), which were effective January 1, 2001. Subsequently on January 10, 2001, the IRS issued the "2001 Final Regulations," which amend the previously released "Permitted Election Changes". The significant changes and clarifications communicated by the IRS are addressed below. Please note: On January 20th, the new administration in Washington ordered that all new regulations not yet printed in the Federal Register, have their effective dates "temporarily postponed for 60 days" for review and possible reversal or modification by the new administration. We do not anticipate any major change, but ProBusiness will keep you informed should the need arise.

CHANGES:

Residence Change

The final regulations released on March 23, 2000, state that if a participant moves in or out of the territory of an HMO, an election change based on the residence change may be allowed if the residence change affects the employee's eligibility for coverage. It had been generally interpreted that a health FSA election would be allowed also, due to the change in the underlying healthcare coverage. The IRS, however, has now clarified that if the change in residence does not affect the eligibility of the employee under the health FSA, no change to the health FSA will be allowed.

"Significant" Cost Increase (and now "Significant" Cost Decrease)

Under the regulations released on March 23, 2000, if the cost of the coverage significantly increases during the plan year, a cafeteria plan may allow employees to increase their contributions to pay for the increased cost, or to revoke their election and choose other similar coverage on a prospective basis. The "2001 Final Regulations" expand the cost change rules to include significant decreases as well as increases. Furthermore, a plan is allowed to permit all eligible employees to elect the reduced cost option. All employee now includes those employees who were eligible to participate in the plan, but did not initially elect to participate in the plan. Unfortunately, the IRS has yet to define the term "significant."

Addition or Elimination of a Plan Benefit

The "2001 Final Regulations", have now expanded this category to include "Significant Improvements in Coverage and or a New Benefit Package Option." The regulations released last year state that if during a period of coverage, a plan adds a new benefit (or eliminates an existing benefit) the cafeteria plan may permit affected employees to elect the new benefit (or elect another benefit if a benefit has been eliminated) prospectively on a pre-tax basis and make corresponding election changes with respect to other benefits providing similar coverage. The newly released regulation expansion allows a plan to permit eligible employees, including those who were eligible but did not make an election, to choose to be covered under the improved or the newly offered option.

Significant Curtailment of Coverage

The previously released regulations indicated that if a particular coverage is significantly curtailed or ceases during a period of coverage, the plan may permit affected employees to revoke their elections under the plan and make a new election for coverage under another option providing similar benefits. Furthermore, it was noted that coverage is considered significantly curtailed "only if there is an overall reduction in coverage provided to participants under the plan so as to constitute reduced coverage to participants generally." The IRS has now added some examples of what they would significantly curtailed which include, a significant increase in the deductible, increased co-pay responsibility imposed on the employee, an increased cost sharing component of the plan, such as an increased office visit fee, and the elimination of a network of providers. In most cases, the loss of one particular physician in a network does not constitute a significant curtailment of coverage.

Certification Requirement

The 2001 "Final Regulations" indicate that an employer may rely on the employee's certification that the employee has or will obtain coverage under another plan, in cases where an employee requests to decrease or cancel coverage because of eligibility under a spouse's or dependent's plan. Certification appears to mean any written form of communication (and signed when possible) where the employee is attesting to their enrollment in or increased coverage under the other plan. Unless the employer has reason to believe that the certification is false, there does not appear to be a need to obtain proof of actual coverage.

CLARIFICATIONS:

HIPAA Special Open Enrollment Rights

The language in the regulations released on March 23, 2000 reinforced the special rights afforded to newborn children, adopted children or children placed for adoption, as well as new spouses under the HIPAA Special Open Enrollment provisions. The "2001 Final Regulations" further clarify that retroactive elections under the cafeteria plan are only allowed in the case of newborn children, adopted children or children placed for adoption, and not for a newly acquired spouse. Thus, an employee may pay for the cost of a newborn child, a adopted child or a child placed for adoption back to the date of birth, adoption or placement for adoption. In the case of newly acquired spouse, the newly acquired spouse must be funded from future pay periods only on a prospective basis. Please remember that health FSA's are only subject to the Special Enrollment Rights afforded under HIPAA in cases where the health FSA is subject to the provisions of HIPAA.

Cost or Coverage Changes and an Elimination of or an Addition of a Benefit Option

The newly released regulations and the respective examples clarify that health FSA elections may not be altered due to Cost or Coverage Changes or Addition/Elimination of a Benefit Option. This is the case even if an employee changed their health insurance from an Indemnity Plan to HMO or vice versa and their co-pays, deductibles, etc were increased or decreased.

COBRA CHANGES:

On January 10, 2001, the IRS also released some clarifications to the COBRA regulations initially released in 1999 (effective January 1, 2000). The most significant of these clarifications was the definition of "Insignificant Shortfall" regarding COBRA payment premiums.

Insignificant COBRA Premium Shortfall

Under COBRA regulations, COBRA continuation coverage cannot be terminated if the COBRA premium paid is short by (underpaid by) an "insignificant" amount. The plan may either accept the short payment amount as payment in full or notify the qualified beneficiary of the premium deficiency and grant a reasonable period of time (IRS states 30 days) for payment of the deficiency. In the 1999 regulations, the IRS did not give any guidance as to what should be considered a insignificant short COBRA premium payment. The IRS has now stated that an amount will be considered insignificant if the short payment is not greater than the lesser of $50.00 or 10% of the required COBRA premium amount due.

Please contact ProBusiness for further information at:
20000 North Creek Parkway, Suite 200, Bothell, WA 98011
Phone: (425) 415-4000 Fax: (425) 417-4795
e-mail: bsa@probusiness.com

(ProBusiness does not make any representation or warranty that the information contained in this newsletter, when used in a specific and actual situation, meets applicable legal requirements. This newsletter should not be construed as legal advice. Your legal counsel should be consulted on all specific fact situations.)

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