Under an Internal Revenue Code Section 125 cafeteria plan, employee’s elections must generally be irrevocable until the beginning of the next plan year. In other words, employees are unable to make a change to their pretax elections made when newly hired or open enrollment unless they experience a permitted election change event (e.g. change in status) allowed under IRS rules (26 CFR § 1.125-4) and the event is recognized by the employers cafeteria plan.
Employers do not have to allow any exceptions to the irrevocable rule for pretax elections1. However, the IRS does allow employers to design their cafeteria plans to permit employees to change their pretax elections prospectively2 when certain conditions are met.
NOTE: Section 125 permitted election changes are regarding pretax deductions to pay for benefits, not the actual enrollment (or disenrollment) in an insurance plan.
But I thought if an employee got married, or had a baby we had to let them enroll in our plan?
It is true, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) requires group medical plans to permit midyear enrollment due to certain events (marriage, birth, adoption, loss of other group coverage etc.). The HIPAA special enrollment requirement is only for medical, it’s not required for excepted benefits, i.e. stand-alone dental, vision or most FSAs. (29 CFR § 2590.701-6)
NOTE: HIPAA is not a directive regarding how benefits are paid, it only mandates that an employee must be allowed to enroll in the medical plan.
HIPAA special enrollment events are a subset of the Section 125 permitted election change events that provide special rights. Therefore, for practical matters, and to avoid requiring the premium to be taken post-tax, at a minimum, employers generally include HIPAA special enrollment events as permissible events allowing for a change to the pretax election, when designing their cafeteria plan3.
1The irrevocable pretax election rules do not apply to health savings accounts (HSAs). Employees may prospectively change (start/stop, increase/decrease) their HSA contribution election at any time during the plan year. An employer must allow for changes at least monthly.
2Under HIPAA special enrollment (birth, adoption or placement for adoption) a retroactive pretax election change may be made. Likewise, if the plan has no waiting period (e.g. employees are eligible for coverage as of the first day of employment), employers may allow new employees to make a retroactive pretax election within 30 days of employment. However, if an employer has a waiting period (e.g. first of the month following date of hire, 30 days etc.) the new employee may only make a prospective election. (i.e. the effective date must be a date after the enrollment form was signed and submitted.)
3HIPAA requires group health plans, to give special enrollment opportunities for HIPAA specific events. Carriers are not required to incorporate all the election changes an employer may allow as permitted, by Treasury Regulations in Section 1.125. Therefore, employers with fully insured coverage, who recognize changes outside of what is required by HIPAA should confirm with their insurance carrier the group insurance contract and permissible cafeteria plan midyear change events are consistent.