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Allowable Flex Plan Status Changes

Events Permitting Election Change

Applicable Regulation

Notes

Change in Status

Six categories of events with strict consistency rules. Only events fitting within one of the categories can support an election change and the change must be absolutely consistent with the event.

  1. Change in employee’s legal marital status
  2. Change in number of dependents
  3. Change in employment status
  4. Dependent satisfies or ceases to satisfy dependent eligibility requirements
  5. Change in residence
  6. Commencement or termination of adoption proceedings
Final Treas. Reg. § 1.125-4(c) (2000) Applies the change in status rules to accident or health coverage & GTL only. Mandatory compliance for plan years beginning on or after 1/1/2001; but can be relied on now.
  Prop. Treas. Reg. § 1.125-4 (c) (2000) Adds the adoption assistance category, and extends the rules to all qualified benefits, including DCAPs and adoption assistance. Can be relied on now.
  Prior Rules:

Temp Treas. Reg. § 1.125-4T (c) (1997)

Applies the change in status rules to accident or health coverage & GTL only. Expires soon; can be relied on only for plan years beginning on or before 11/6/2000.
  Prior Rules:

Temp Treas. Reg. § 1.125-4, Q/A-6(c) (1989), amended 1997, withdrawn and republished 2000

After the 1997 amendment, except as provided in #6 below, Q/A-6(c) applies only to qualified benefits other than accident or health plans and GTL (i.e., to DCAPs and adoption assistance plans). Both Q/A-6(c) and Prop. Treas. Reg. § 1.125-4 (c) (2000), which extends the final change in status regulations to DCAPs and adoption assistance plans, can be relied upon.
Cost Changes, with automatic increase/decreases Prop. Treas. Reg. § 1.125-4 (f)(2)(i) (2000) Applies to DCAPs, self-funded health plans (but not health FSAs), insured health plans, and other qualified benefits. Can be relied on now.
  Prior Rules:

Prop. Treas. Reg. § 1.125-2, Q/A-6(b)(1) (1989

Applied rules to insured health plans only. 2000 proposed regulations acknowledge that old rules can continue to be relied upon, but it is unlikely they would provide any additional leeway.
  • Significant Cost Increases
  • Prop. Treas. Reg. § 1.125-4 (f)(2)(ii) (2000) Applies to DCAPs, self-funded health plans (but not health FSAs), insured health plans, and other qualified benefits. Can be relied on now.
      Prior Rules:

    Prop. Treas. Reg. § 1.125-2, Q/A-6(b)(1) (1989

    Applied rules to insured health plans only. 2000 proposed regulations acknowledge that old rules can continue to be relied upon, but it is unlikely they would provide any additional leeway
  • Coverage  Reduction
  • Prop. Treas. Reg. § 1.125-4 (f)(3)(i) (2000) Applies to DCAPs, self-funded health plans (but not health FSAs), insured health plans, and other qualified benefits. Can be relied on now.
      Prior Rules:

    Prop. Treas. Reg. § 1.125-2, Q/A-6(b)(2) (1989

    Applied rules to insured health plans only. 2000 proposed regulations acknowledge that old rules can continue to be relied upon, but it is unlikely they would provide any additional leeway
  • Addition or Elimination of Benefit Package Option
  • Prop. Treas. Reg. § 1.125-4 (f)(3)(ii) (2000) Applies to DCAPs, self-funded health plans (but not health FSAs), insured health plans, and other qualified benefits. Can be relied on now.
  • Change in Coverage of Spouse or Dependent Under Other Employer’s Plan
  • Prop. Treas. Reg. § 1.125-4 (f)(4) (2000) Applies to DCAPs, self-funded health plans (but not health FSAs), insured health plans, and other qualified benefits. Can be relied on now.
      Prior Rules:

    Temp Treas. Reg. § 1.125-2, Q/A-6(c) (1989), amended 1997, withdrawn and republished 2000

    Applied to accident or health plans where there is a significant change in the health coverage of the employee or spouse attributable to the spouse’s employment.

    2000 proposed regulations acknowledge that old rules can continue to be relied upon, but it is unlike they would provide any additional leeway.

  • Cessation of Required Contributions
  • Prop. Treas. Reg. § 1.125-2, Q/A-6(e)(1989) Disregard this exception as if virtually never applies.
  • Separation from Service
  • Final Treas. Reg. § 1.125-4(c)(2)(iii) (2000) (the change in status rules; exception #1 above) Applies the rules to accident or health coverage & GTL only.

    Mandatory compliance for plan years beginning on or after 1/1/2001; but can be relied on now.

      Prop. Treas. Reg. § 1.125-4 (c) (2000) Adds the adoption assistance category, and extends the rules to all qualified benefits, including DCAPs and adoption assistance. Can be relied on now.
      Prior Rules:

    Prop. Treas. Reg. § 1.125-4, Q/A-6(d) (1989), amended 1997, withdrawn and republished 2000

    After 1997 amendment, the rules apply only to qualified benefits other than accident or health plans and GTL (i.e., to DCAPS and adoption assistance plans).

    2000 proposed regulations acknowledge that old rules can continue to be relied upon, but it is unlikely they would provide any additional leeway.

  • FMLA Leave
  • Final Treas. Reg. § 1.125-4(g) (2000) Mandatory compliance for plan years beginning on or after 1/1/2001; but can be relied on now.
      Prior Rules:

    Prop. Treas. Reg. § 1.125-3 (1995)

    Presumably the 1995 proposed regulations, which deal exclusively with FMLA issues, can continue to be relied on.
  • Changes in 401K Contributions
  • Final Treas. Reg. § 1.125-4(h) (2000) Mandatory compliance for plan years beginning on or after 1/1/2001; but can be relied on now.
      Prior Rules:

    Temp. Treas. Reg. § 1.125-4T(j) (1997)

    Expires soon; can be relied on only for plan years beginning on or before 11/6/2000.
  • HIPAA Special Enrollments
  • Final Treas. Reg. § 1.125-4(b) (2000) Mandatory compliance for plan years beginning on or after 1/1/2001; but can be relied on now.
      Prior Rules:

    Temp. Treas. Reg. § 1.125-4T(b) (1997)

    Expires soon; can be relied on only for plan years beginning on or before 11/6/2000.
  • COBRA Events
  • Final Treas. Reg. § 1.125-4(c)(3)(iv) (2000) Mandatory compliance for plan years beginning on or after 1/1/2001; but can be relied on now.
      Prior Rules:

    Temp. Treas. Reg. § 1.125-4T(c) 3)(ii) (1997)

    Expires soon; can be relied on only for plan years beginning on or before 11/6/2000.
  • Judgment, Decree or Order
  • Final Treas. Reg. § 1.125-4(d) (2000) Mandatory compliance for plan years beginning on or after 1/1/2001; but can be relied on now.
      Prior Rules:

    Temp. Treas. Reg. § 1.125-4T(d) (1997)

    Expires soon; can be relied on only for plan years beginning on or before 11/6/2000.
  • Medicare or Medicaid Entitlement
  • Final Treas. Reg. § 1.125-4(e) (2000) Mandatory compliance for plan years beginning on or after 1/1/2001; but can be relied on now.
      Prior Rules:

    Temp. Treas. Reg. § 1.125-4T(e) (1997)

    Expires soon; can be relied on only for plan years beginning on or before 11/6/2000.

      ç Go Back to Cafeteria Plans


    What if an employee makes an Enrollment Mistake? consider this hypothetical example: IF an employee just noticed that her first paycheck for this year reflected a salary reduction for DCAP benefits. And then claims they never elected such benefits but they signed the election form that contains a DCAP election. The employee realizes a mistake was made but insists the plan sponsor fix it anyway. Can they do this under the IRS rules?

    Possibly, but only if you conclude that (1) there is "clear and convincing evidence" that your employee made a mistake; (2) the mistake is of a type that can be corrected; and (3) the correction is appropriate. The permitted election changes regulations (Prop. Treas. Reg. Sec. 1.125-4) do not allow election changes for mistakes at all. But

    IRS officials have informally commented that an employee's election may be undone when there is "clear and convincing evidence" of a mistake. Employers generally use two approaches for evaluating whether such evidence exists: the "impossibility" approach and the "facts and circumstances" approach.

    1. Employers who use the impossibility approach allow an election change only if the evidence indicates that it was impossible for the employee to benefit from the mistaken election. (Thus, you could undo your employee’s election for DCAP benefits if you are convinced they has no “qualifying individuals” under a DCAP.) The impossibility approach is the safest and easiest to administer because plan administrators need not examine subjective employee motives, and their decisions are consequently less likely to invite IRS scrutiny.

    2. Under the “facts and circumstances” approach, errors may be corrected if the plan administrator can reasonably ascertain that a mistake actually occurred. Because this approach may require inquiry into an employee’s intentions (by examining extrinsic evidence of those intentions), it is likely to be more closely scrutinized by the IRS.  You might consider adopting and consistently following written guidelines that require consideration of the following factors, among others: evidence of historical elections and benefit usage patterns (e.g., whether your employee has ever elected your DCAP in the past and/or has consistently used her spouse’s DCAP if there were qualifying individuals); plausible evidence of a clerical mistake (e.g., while an employee might easily write $5,000 instead of $500, it is harder to believe that $5,000 was written instead of $2,400); assessment of the employee’s truthfulness; proximity to the first payroll date after the new election is in force (your employee called this mistake to your attention right after her first 2004 paycheck—this is one factor arguing in favor of allowing an election change); and whether changed circumstances of the employee indicate reconsideration of a decision rather than a mistake. You must also obtain a signed certification from the employee describing the mistake and the intended election (e.g., if they intended to elect benefits under the health FSA instead, as they has historically done, the appropriate correction would be election of such benefits). To reduce the possibility of challenges to the “facts and circumstances” approach, plan administrators may also wish to consider adopting additional guidelines, such as a time limit (e.g., 30 days after the close of the first payroll period) within which requests for changes in mistaken elections must be made.

    Under either approach, so long as the "clear and convincing" standard is met, clerical, arithmetic and data entry errors by employees may be corrected retroactively. But mistakes as to the scope of a benefit or the tax treatment of a benefit cannot be corrected at all. (Thus, you could not permit your employee to change her election just because they mistakenly believed that the DCAP provided more tax savings than did the dependent care tax credit.) The IRS has indicated that it will formally address mistaken elections when the proposed cafeteria plans regulations are finalized--such guidance will be most welcome.

      ç Go Back to Cafeteria Plans


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