When an employee wants to make a change to their health benefits outside of the plan’s open enrollment, an employer should consider what the and law and accompanying regulations allow, what their health insurance carrier allows, and what their health plan documents allow.
Section 125 and HIPAA
The first regulation governing mid-year benefit changes is Section 125 of the IRS code. This code is what allows employers to take employee deductions for health benefits on a pre-tax basis. This code requires that an employee must have a qualifying event to make a change outside of open enrollment (often called a “mid-year” change). It then defines which of these qualifying events are allowed. The list includes typical life events such as marriage, birth, divorce, adoption, and involuntary loss of other coverage, but the list is actually quite expansive. The regulations permit employers to allow all the qualifying events listed, but allows employers to limit them as well. The only regulations that must be permitted are HIPAA qualifying events.
The Health Insurance Portability and Accountability Act (HIPAA) is the second regulation that governs qualifying events and mandates that an employer allows at least the following qualifying events for mid-year changes: marriage, birth, adoption, placement for adoption, loss of eligibility for other coverage, termination of Medicare or CHIP eligibility, or new eligibility for premium assistance under Medicaid or CHIP.
According to HIPAA, employees must request any changes 30 days from the date of the qualifying event with two exceptions; the time extends to 60 days if the qualifying event is termination of Medicare or CHIP eligibility, or new eligibility for premium assistance under Medicaid or CHIP.
The Employee Benefits Security Administration website includes more information about HIPAA.
No pre-tax deductions?
If you do not take employee deductions pre-tax (or if your employees are not required to contribute to the cost of enrollment), then Section 125 rules may not apply to you and you could therefore allow any mid-year changes under the law. However, most carriers still limit mid-year changes, as discussed below.
While most employers are aware of Section 125 and HIPAA, what may be less well known is that health carriers often limit qualifying events in their policies, which employers agree to follow when they enroll in coverage with that carrier. Typically, carriers do not limit when members may terminate coverage; they are more concerned with mid-year enrollments. Many carriers limit these mid-year enrollments to HIPAA events only, and require timing of notification consistent with HIPAA. As noted above, the HIPAA enrollment options are severely limited when compared to enrollment events listed in Section 125.
The discrepancy between Section 125 and HIPAA, and the consideration of how health carriers apply regulations are important when writing plan documents. It may be that plan documents provided through a templated source allow several Section 125 events (or all events) that a health carrier may limit through their policies. Thankfully, plan documents typically include carrier policies. Employers may therefore find it prudent to include a statement in their plan documents that limits qualifying events to the most restrictive definition found among the several plan documents.
Employers may want to be generous to employees by allowing all Section 125 qualifying events, but it is important that plan administration matches all carrier policies so that employers avoid subjecting themselves to additional liability.
In practice, it will also be important that employers take the most limited definition into consideration when an employee requests a mid-year change. In the event of a claim, health carriers may audit a member’s eligibility for coverage (especially if the claim is large). If they determine that the employee was allowed to enroll outside of open enrollment without a qualifying event, they have the right to deny the claim, even if the employer has been paying for coverage. This would leave the employee with a coverage gap and could put the liability for paying those claims on the employer.
Lau & Lau Associates supports employers as they consider employee requests for mid-year changes. If you have any questions or need additional resources, please contact us.