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Additional Permitted Election Changes for Health Coverage under
Section 125 Cafeteria Plans
Notice 2022-41
PURPOSE
This notice expands the application of the permitted change-in-status
rules for health coverage under a section 125 cafeteria plan (cafeteria
plan). In particular, this notice addresses the situation in which, during a
period of coverage (typically a plan year), a cafeteria plan participant may
wish to revoke the employee’s election under the cafeteria plan for other-
than-self-only (family) coverage under a group health plan (other than a
flexible spending arrangement (FSA)) in order to allow one or more family
members to enroll in a Qualified Health Plan (QHP) through a Health
Insurance Exchange (Exchange) in the individual market. Under this notice,
the employee will be able to elect out of family coverage and into self-only
coverage (or family coverage including one or more already-covered
related individuals) under that health plan prospectively during a period of
coverage, provided specific conditions are satisfied.
The Department of the Treasury and the Internal Revenue Service
intend to modify the Income Tax Regulations under section 125 of the
Internal Revenue Code (Code) consistent with the provisions of this notice.
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Taxpayers may rely on the guidance in this notice for plan amendments
allowing elections effective on or after January 1, 2023.
This notice is being issued in conjunction with regulations under
section 36B, which provide that the affordability of an offer of group health
plan coverage for a related individual is based on the employee’s cost to
cover the employee and the employee’s related individuals. See § 1.36B-
2(c)(3)(v)(A)(2); 87 FR 61979 (Oct. 13, 2022).
BACKGROUND
Section 125(d)(1) defines a cafeteria plan as a written plan
maintained by an employer under which all participants are employees and
under which all participants may choose among two or more benefits
consisting of cash and qualified benefits. Section 125(f) generally defines a
qualified benefit as any benefit which, with the application of section 125(a),
is not includable in the gross income of the employee by reason of an
express provision of the Code (with certain exceptions). Qualified benefits
include employer-provided accident and health plans excludable from gross
income under sections 106 and 105(b), but exclude long term care
insurance and certain QHPs.
Consistent with longstanding rules for cafeteria plans, a written
cafeteria plan generally must provide that elections are irrevocable, except
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to the extent that the optional change-in-status rules in § 1.125-4 have
been included in the cafeteria plan.
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Section 1.125-4 provides rules on the
circumstances in which a cafeteria plan may permit changes to elections
under the plan. Cafeteria plans are not required to allow any of the changes
permitted under § 1.125-4.
Section 1.125-4(c) permits a cafeteria plan to allow an employee to
revoke an election during a period of coverage with respect to coverage
under an accident or health plan as defined in § 1.105-5 and make a new
election for the remaining portion of the period if, under the facts and
circumstances, (i) a change in status occurs, and (ii) the election change
satisfies the consistency requirements of § 1.125-4(c)(3). A change in
status for this purpose includes a change in employment status as
described in § 1.125-4(c)(2)(iii). A change in employment status for this
purpose includes only a change in an individual’s employment status that
results in a change in the individual’s eligibility for coverage under the
group health plan. Thus, under the regulations, a change in employment
status that does not result in an employee or a related individual either
becoming or ceasing to be eligible for coverage under the group health
plan is not a change in status for which a plan may allow the employee to
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See, e.g., Prop. Reg. § 1.125-1(c)(1)(iii); 72 FR 43938, 43948 (Aug. 6, 2007).
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revoke an election of health coverage under the cafeteria plan during a
period of coverage.
Even if the change in status results in a change in eligibility for
coverage under the group health plan, any revocation of an election must
satisfy the consistency requirements of § 1.125-4(c)(3)(i) and (iii). Those
requirements provide that if an employee’s change in status results in an
individual covered by a group health plan due to the individual’s
relationship to the employee ceasing to satisfy eligibility requirements for
coverage, the employee is not permitted to elect to revoke an election of
coverage under the cafeteria plan for any individual who did not lose
eligibility. Similarly, if a change in status results in an individual gaining
eligibility for coverage under a second group health plan, an employee’s
election to cease or decrease coverage for that individual under the
cafeteria plan is permitted only if the individual enrolls in the coverage for
which the individual is newly eligible.
Furthermore, § 1.125-4(b) permits a cafeteria plan to allow an
employee to revoke an election under a group health plan during a period
of coverage and to make a new election that corresponds with the special
enrollment rights under section 9801(f).
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The Affordable Care Act
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created the ability to enroll in QHPs through
an Exchange. Special enrollment rights under section 9801(f) concern
rights to enroll in a group health plan due to loss of other coverage or
certain family events, but do not include the ability to enroll in a QHP
through an Exchange. The ACA includes separate provisions regarding
enrollment in QHPs through an Exchange during open and special
enrollment periods. In order to allow employees to enroll in a QHP through
an Exchange if they would prefer that coverage, Notice 2014-55 (2014-41
IRB 672) expanded the ability of cafeteria plans to allow employees to
revoke elections for group health plan coverage in two situations.
The first situation in Notice 2014-55 addresses an employee with a
specified reduction in hours. Specifically, a cafeteria plan may allow that
employee to revoke prospectively an election for group health plan
coverage if (1) the change in that employee’s status does not result in the
employee ceasing to be eligible under the group health plan; and (2) the
revocation of the election of coverage under the group health plan
corresponds with the intended enrollment of the employee, and any related
individuals who cease coverage due to the revocation, in another plan that
2
The Patient Protection and Affordable Care Act, Pub. L. 111–148 (124 Stat. 119 (2010)), and the Health
Care and Education Reconciliation Act of 2010, Pub. L. 111–152 (124 Stat. 1029 (2010)), collectively
referred to as the Affordable Care Act or ACA.
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provides minimum essential coverage, with the new coverage effective no
later than the first day of the second month following the month that
includes the date the original coverage is revoked.
The second situation in Notice 2014-55 addresses an employee who
is eligible to enroll in a QHP through an Exchange. Specifically, a cafeteria
plan may allow an employee to revoke prospectively an election for group
health plan coverage if (1) the employee is eligible for a special enrollment
period to enroll in a QHP through an Exchange pursuant to guidance
issued by the Department of Health and Human Services
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and any other
applicable guidance, or the employee seeks to enroll in a QHP during the
Exchange’s annual open enrollment period; and (2) the revocation of the
election of coverage under the group health plan corresponds to the
intended enrollment of the employee, and any related individuals who
cease coverage due to the revocation, in a QHP through an Exchange for
new coverage that is effective beginning no later than the day immediately
following the last day of the original coverage that is revoked. However,
Notice 2014-55 does not allow the revocation of an election for group
health plan coverage when only related individuals, and not the employee,
become eligible to enroll in a QHP through an Exchange.
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See 45 CFR § 155.420(d).
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Section 36B allows a premium tax credit to applicable taxpayers who
satisfy certain eligibility requirements, including that an individual in the
taxpayer’s family enrolls in a QHP through an Exchange for one or more
months in which the individual is not eligible for employer-sponsored
minimum essential coverage (including group health plan coverage) or
certain other minimum essential coverage. See section 36B(c)(2)(B) and
§ 1.36B-3(c). Section 36B(c)(2)(C) generally provides that an individual is
not treated as eligible for group health plan coverage if the coverage
offered is unaffordable or does not provide minimum value. However, an
individual who enrolls in group health plan coverage is eligible for that
coverage, and therefore ineligible for a premium tax credit, irrespective of
whether it is affordable or provides minimum value.
Previous regulations under section 36B provided that the affordability
of an offer of group health plan coverage for an individual who may enroll in
the coverage because of a relationship to an employee of the employer (a
related individual) was based on the employee’s self-only cost to enroll in
the coverage.
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This rule was changed in recently issued regulations under
section 36B, which provide that the affordability of an offer of group health
plan coverage for a related individual is based on the employee’s cost to
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See 78 FR 7264 (Feb. 1, 2013).
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cover the employee and the employee’s related individuals. See § 1.36B-
2(c)(3)(v)(A)(2); 87 FR 61979 (Oct. 13, 2022). Affordability of an offer of
group health plan coverage to an employee, however, continues to be
based on the employee’s self-only cost to enroll in the coverage.
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nteraction with Current Change-in-Status Rules
Under the current change-in-status rules under § 1.125-4 and Notice
2014-55, a cafeteria plan is not permitted to allow an employee to revoke
an election of family coverage under a group health plan during a period of
coverage and elect self-only coverage (or family coverage including one or
more already-covered related individuals) solely to allow one or more
related individuals who had also been enrolled in the group health plan to
instead enroll in a QHP through an Exchange (or separate QHPs if there is
more than one related individual). This is the case even when the related
individuals are newly eligible to enroll in a QHP through an Exchange
during a special enrollment period or during the Exchange’s annual open
enrollment period.
In many instances, the current rules for changes in status would not
restrict employees’ and related individuals’ choices regarding coverage. For
a related individual enrolled in a calendar year group health plan through
the cafeteria plan offered to an employee, the employee may revoke the
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related individual’s coverage under the plan during the plan’s annual open
season at the end of the plan year so that the related individual generally
may immediately begin coverage the next calendar year under a QHP,
enrolling during the Exchange’s annual open enrollment period. However, a
related individual enrolled through a cafeteria plan in a group health plan
with a non-calendar plan year might not be able to synchronize the change
in coverage to avoid either an overlapping period of coverage or a gap in
coverage because the existing cafeteria plan change-in-status rules do not
allow the revocation of coverage when only related individuals, and not the
employee, become eligible to enroll in a QHP through an Exchange.
In addition, under § 1.125-4(b), a cafeteria plan may allow an
employee to revoke an election under a group health plan during a period
of coverage and to make a new election that corresponds with special
enrollment rights under section 9801(f). However, special enrollment rights
under section 9801(f) relate only to enrollment in group health plan
coverage, not a right to enroll in a QHP through an Exchange.
Finally, there are some circumstances in which a related individual
may become eligible for a special enrollment period during a plan year and
newly eligible to enroll in a QHP through an Exchange, and a premium tax
credit under section 36B may be allowed for the QHP coverage of the
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related individual (for example, if a related individual relocates to another
state). See 45 CFR § 155.420(d). Under the current change-in-status rules,
however, an employee would be unable to revoke family coverage in a
group health plan to allow any related individuals to enroll in a QHP through
an Exchange while at the same time the employee elects to enroll in self-
only coverage (or family coverage including one or more already-covered
related individuals) under the group health plan.
As noted previously, under § 1.36B-2(c)(3)(v)(A)(2), affordability of an
offer of group health plan coverage for a related individual is based on the
employee’s cost to cover the employee and the employee’s related
individuals. Consequently, an employee may wish to revoke the election of
group health plan coverage for one or more related individuals so the
related individuals may enroll in a QHP through an Exchange and be
allowed a premium tax credit for the related individual’s QHP coverage. In
the case of group health plan coverage elected through a non-calendar
year cafeteria plan, however, or in situations in which a premium tax credit
would be allowed for a related individual during the plan year if the related
individual was enrolled in a QHP through an Exchange and not in the group
health plan coverage, current rules require the employee to delay this
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change until the plan’s annual open enrollment period, even if the
employee would prefer to make the change sooner.
GUIDANCE
In addition to the situations described in Notice 2014-55, a cafeteria
plan may allow an employee to revoke prospectively an election of family
coverage under a group health plan that is not a health FSA and that
provides minimum essential coverage (as defined in section 5000A(f)(1))
provided the following conditions are satisfied:
(1) One or more related individuals are eligible for a special
enrollment period to enroll in a QHP through an Exchange pursuant to
guidance issued by the Department of Health and Human Services
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and
any other applicable guidance, or one or more already-covered related
individuals seeks to enroll in a QHP during the Exchange’s annual open
enrollment period; and
(2) The revocation of the election of coverage under the group health
plan corresponds to the intended enrollment of the related individual or
related individuals in a QHP through an Exchange for new coverage that is
effective beginning no later than the day immediately following the last day
of the original coverage that is revoked. If the employee does not enroll in a
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See 45 CFR § 155.420(d).
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QHP through an Exchange as set forth in Notice 2014-55, the employee
must elect self-only coverage (or family coverage including one or more
already-covered related individuals) under the group health plan.
A cafeteria plan may rely on the reasonable representation of an
employee that the employee and/or related individuals have enrolled or
intend to enroll in a QHP through an Exchange for new coverage that is
effective beginning no later than the day immediately following the last day
of the original coverage that is revoked.
EFFECTIVE DATE AND PLAN AMENDMENTS
The guidance in this notice is effective for elections effective on or
after January 1, 2023. Taxpayers may rely on the guidance in this notice
pending further guidance.
To allow the new permitted election changes under this notice, an
employer must amend a cafeteria plan to provide for these election
changes. An employer must adopt the amendment on or before the last
day of the plan year in which the elections are allowed, and the amendment
may be effective retroactively to the first day of that plan year, provided that
the cafeteria plan operates in accordance with the guidance under this
notice and the employer informs participants of the amendment, and
provided further that an employer may amend a cafeteria plan to adopt the
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new permitted election changes for a plan year that begins in 2023 at any
time on or before the last day of the plan year that begins in 2024.
However, in no event may an employer amend a cafeteria plan to allow an
election to revoke coverage on a retroactive basis.
EFFECT ON OTHER DOCUMENTS
Notice 2014-55 is amplified.
DRAFTING INFORMATION
The principal author of this notice is Jennifer Friedman of the Office of
Associate Chief Counsel (Employee Benefits, Exempt Organizations, and
Employment Taxes). For further information regarding this notice, contact
Jennifer Friedman at (202) 317-5500 (not a toll-free number).
