Election Benefits

20. Can a participant revoke existing elections and make new elections under a cafeteria plan?

Generally not until the end of the plan year. However, under certain circumstances participants can change their elections. These situations are currently limited to: changes in cost of coverage, changes in family status, terminations of employment, 401(k) modifications and modifications to prevent discrimination (see Questions 21-25 below). If a new election is permitted, then such new election must be consistent with the reason that such change is permitted (Reg. Sec. 1.125-2 Q&A-6).

21. Is an employer required to allow participants to change their elections?

No. Nothing in the code or regulations requires an employer to permit participants to revoke their benefit elections. This is an optional plan design feature. However, if language permitting such elections changes is included in your Plan Document, you must uniformly allow employees to make such changes. The sample Plan Document provided to you permits such changes (Reg. Sec. 1.125-2 Q&A-6).

22. What is a change in family status?

The proposed regulations permit a participant to revoke an election and make a new election if the revocation and new election are both on account of and consistent with a change in family status. In order to be "consistent" with a family status change, an election change must be necessary or appropriate as a result of the family status change [Reg. Sec. 1.125-2, Q&A-6(c)].

For this purpose, the Proposed Regulations describe a change in family status to include:

• the employee's marriage or divorce;

• the birth or adoption of an employee's child;

• the death of an employee's spouse or dependent;

• the commencement or termination of employment by the employee's spouse;

• a change of employment status from full-time to part-time (or vice versa) by the employee or employee's spouse, or if either takes an unpaid leave of absence from work; or

• a significant change in health benefits coverage attributable to the employment of the employee's spouse.

If the cost of a health plan provided by an independent, third-party provider under a cafeteria plan increases or decreases by an insignificant amount during a plan year, the Proposed Regulations permit a Plan Administrator to automatically increase or decrease (as the case may be) all affected participants' elective contributions for the health plan. On the other hand, if the premium amount significantly increases, or if the coverage is significantly curtailed or ceases, the Plan Administrator may permit affected participants either to make a corresponding change in their premium payments or to revoke their existing elections and receive coverage under another health plan with similar coverage. No other elective adjustment of participant contributions or revocation of participant elections is permitted on account of a change in the cost of a health plan [Reg. Sec. 1.125-2, Q&A-6(b)].

It should be noted that a revocation of election by a participant and election of coverage under another health plan pursuant to this provision is permitted only if:

the plan is a health plan;
the coverage is provided by an independent third-party provider (i.e., it is not a self-insured plan);
coverage is significantly curtailed or ceases, or the premium amount significantly increases; and
coverage under a health plan with similar coverage is available under the cafeteria plan.

A revocation of election without an election of replacement coverage is not permitted under the applicable regulations.

24. Can terminated participants revoke their elections?

Yes, if the plan so provides. A cafeteria plan may permit, but is not required to permit, an employee who separates from service during a period of coverage to revoke existing benefit elections for the remaining portion of the coverage. However, such employee is prohibited from making new elections under the cafeteria plan (if he is rehired) until the beginning of the next plan year. A cafeteria plan may also allow a benefit to be terminated if the employee fails to make the required premium payments for that benefit (Reg. Sec. 1.125-2, Q&A-6).

25. If a cafeteria plan contains a 401(k) provision, can participants change their elections during the year?

Yes. A cafeteria plan may permit a participant to modify or revoke the 401(k) plan election as permitted under Section 401(k) (Reg. Sec. 1.125-2 Q&A6).

26. Can elections be revoked or modified to prevent a cafeteria plan from becoming discriminatory?

The legislative history of Code 125 indicates that a Plan Administrator may retain discretion to modify, cut back or revoke a highly compensated individual's election (or key employee's election) in certain situations, if the Plan Administrator determines that the plan may fail to satisfy any nondiscrimination requirement imposed by the Internal Revenue Code. However, such action should be uniformly and nondiscriminately applied to similarly situated participants.

27. What are the consequences of violating the irrevocable election rules?

A Plan Sponsor that fails to follow the irrevocable election rules (summarized above) could have its cafeteria plan determined to be invalid (Reg. Sec. 1.125-2, Q&A-6). Consequently, all employees could be required to include as income the full value of all benefits (whether taxable or nontaxable) available to them under the cafeteria plan. Furthermore, the Plan Sponsor could lose the FICA tax savings attributable to pre-tax cafeteria plan elections.

28. Can a cafeteria plan use a one-time election that renews automatically unless the employee revokes it?

Yes. Nothing prevents this automatic election to be part of the cafeteria plan, as long as the employee agrees. This "rollover" enrollment should not be used for unreimbursed medical and dependent care expenses since those expected expenses often change from year to year. The sample Plan Document included in this manual utilizes this feature.

29. If a participant elects to pay for medical coverage through the pre-tax premium feature of a cafeteria plan and then drops the coverage without a valid change in family status, can the employer reinstate the employee's unreduced salary?

No. Unless there is a valid change in family status or a significant change in the cost of coverage, the plan cannot allow for an upward salary adjustment. Any increase in pay must be independent of the election modification under the cafeteria plan. Coverage may be dropped but not the election.

Eligibility FAQs