3508 / Can an employee change benefit elections under a cafeteria plan because of significant cost or coverage changes?
A plan may automatically make a prospective change in an employee’s salary reduction amount if the cost of a qualified benefits plan increases or decreases during a period of coverage. If the cost of a benefit package option significantly increases during a period of coverage, the cafeteria plan may allow employees to either increase their salary reduction amounts or revoke their elections for this benefit and elect another benefit package option that offers similar coverage on a prospective basis. If the cost of a qualified benefits plan significantly decreases during the year, the cafeteria plan may allow all employees, even those who have previously not participated in the plan, to elect to participate in the plan for the option with such decrease in cost. A cost change applies in the case of dependent care assistance only if the cost change is imposed by a dependent care provider who is not a relative of the employee, as defined in IRC Section 152.2
If an employee has a significant curtailment of coverage under a plan during a period of coverage that is a “loss of coverage,” the cafeteria plan may permit the employee to revoke his or her election under the plan and elect to receive, on a prospective basis, coverage under another option providing similar coverage. The employee may drop the coverage if no similar option is available. A “loss of coverage” means a complete loss of coverage under the benefit package option or other coverage option (e.g., the elimination of an option, an HMO ceasing to be available in the area, or losing all coverage under the option by reason of an overall lifetime or annual limitation).3
Other events constituting a loss of coverage include:
(1) a substantial decrease in medical care providers (such as a major hospital ceasing to be a member of a preferred provider network or a substantial decrease in the physicians participating in a preferred provider network or an HMO),(2) a reduction in the benefits for a specific type of medical condition or treatment with respect to which the employee or the employee’s spouse or dependent is currently in a course of treatment, or
(3) any other similar fundamental loss of coverage.4