125 Plans: Additional Election Change Opportunity for Non-Calendar Year Plans

The IRS and Treasury department have released Notice 2022-41 which corrects an inconsistency in the regulations for non-calendar year plans. This inconsistency follows along with the regulatory corrections of the “family glitch” for ACA coverage that were just finalized by the DOL. 

Which employers does the change apply to?

The change is only relevant for employers with non-calendar year Section 125 plans. Employers who have a calendar year Section 125 plan do not need to pay attention to this.

What is the change?

The newly permitted election change applies to individuals covered under a non-calendar year cafeteria plan who have elected family coverage and have dependents who become newly eligible to enroll in a Qualified Health Plan under an Exchange. The new guidance allows plans to allow participants to revoke family coverage under the group health plan to enroll dependents in coverage through the Exchange (thus changing their own election to self-only coverage under the plan.) Note that the change only applies to health plan election changes; it does not allow participants to make a change in a health FSA plan.

Why was this necessary?

Existing regulations allow for this election change opportunity for calendar year plans; however, the wording of the regulations constricted a parallel election change opportunity for participants in non-calendar year plans. The issue here is that, when dependents become newly eligible for Exchange coverage, the tax credit available to the family may make it more advantageous for the participant to opt dependents off of the group health plan in favor of Exchange coverage. This type of election change was previously prohibited under non-calendar year plans. The newly issued regulations conform to this type of election change for non-calendar year plans.

Effective Date

The effective date of this guidance is January 1, 2023.

Vita Plans

Vita will amend all Vita-created Section 125 Plan Documents to reflect this updated guidance for medical plan election changes.