Question: Employer offers health plan coverage effective date of hire, with a 30-day election window from the date of hire. Can the employer change the new-hire election period to 60 days from the date of hire?
Compliance Team Response:
The employer has full control of determining the new hire election period set forth in the Section 125 cafeteria plan, within any limitations imposed by the insurance carrier (or stop-loss provider if self-insured). However, a key consideration in that decision will be when they want the new hire’s election to be effective. If they want to continue offering new hire coverage that has retroactive effect back to the date of hire, they will likely want to keep the 30-day window for new hires. There is a general rule in Section 125 (which governs all employees’ pre-tax premium elections) that all elections must be made on a prospective basis. There are two primary exceptions to that general rule that permit retroactive pre-tax payment for coverage. One is for retroactive coverage to the date of birth, adoption, or placement for adoption for a new child (see our post detailing HIPAA special enrollment events for more details). The other exception is for retroactive coverage to the date of hire. The new hire exception provides that a Section 125 election may be retroactive to the date of hire as long as it is made within 30 days of the date of hire. This is why many plans are structured to incorporate that provision by design. The result is that if you changed the new hire election period to 60 days, there would be no option for new hires to pay for the period of coverage prior to the date of the election (i.e., back to the date of hire) on a pre-tax basis.
That means one of the following would have to occur with a 60-day new hire election window:
- The employer would have to pay the full cost of the retroactive coverage period (i.e., waive the retroactive employee-share of the premium);
- The employer would require the employee pay for the retroactive coverage period on an after-tax basis (i.e., the employee pays outside of the cafeteria plan); or
- Coverage would be effective no sooner than the date the employee elects to enroll (i.e., no retroactive coverage back to the date of hire).
Prop. Treas. Reg. § 1.125-2(d)
(d) Optional election for new employees. A cafeteria plan may provide new employees 30 days after their hire date to make elections between cash and qualified benefits. The election is effective as of the employee’s hire date. However, salary reduction amounts used to pay for such an election must be from compensation not yet currently available on the date of the election. The written cafeteria plan must provide that any employee who terminates employment and is rehired within 30 days after terminating employment (or who returns to employment following an unpaid leave of absence of less than 30 days) is not a new employee eligible for the election in this paragraph (d).
Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship. Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).