The IRS recently released IRS Notice 2022-41, which creates a new permitted election change for cafeteria plans.

Who is impacted by this IRS Notice?

This Notice impacts employers that sponsor cafeteria plans, such as EBC’s BESTflex Plan or BESTflex Premium Only Plan, and the employees covered by the employer’s group health plan.

What is the new permitted election change?

Put simply, the new permitted election change allows an employee to drop group health plan coverage for a dependent so the dependent can enroll in an individual health insurance plan through the Marketplace. More technically, this new permitted election change allows an employee to reduce their pre-tax election amount for group medical premiums mid-year from family to self-only coverage on a prospective (i.e., going forward) basis if the following conditions are met:

• • One or more of the employee’s dependents are eligible for a special or open enrollment period in the Marketplace, and
  • The change to the employee’s election is related to their dependent(s) intended enrollment in individual health insurance coverage through the Marketplace. The Marketplace health insurance coverage must be effective beginning no later than the day immediately following the last day they are covered under the employee’s employer plan.

This is effective for changes made on or after January 1, 2023.

Some employers might have additional coverage tiers, such as self + spouse, self + child, self + 1, self +2, etc. This new permitted election change event allows employees to shift their pre-tax election amount from a higher tier to a lower tier if the two conditions above are met.

Note: Employees who are enrolled in employer-sponsored medical coverage might wish to drop their own coverage in order to join their dependents on an individual health insurance plan through the Marketplace. That is currently allowable under a different permitted election change event that was created by the IRS when the Marketplace originally opened.

Why was this new permitted election change created?

The IRS created this new permitted election change in connection with a new premium tax credit regulation. This new regulation will make it easier for some employees’ spouses/children to find cheaper coverage through the Marketplace because they will qualify for increased premium tax credits. This has been referred to as “fixing the family glitch” in the Affordable Care Act (ACA) original premium tax credit rules. The new permitted election change allows employees to drop coverage for such spouses/children so that they can enroll in subsidized individual health insurance through the Marketplace.

Will this change cause a lot of new permitted election changes?

Most likely no. The government estimates that only a “modest” number of individuals (approximately 1 million overall) will leave employer plans for individual health insurance plans through the Marketplace as a result of the family glitch correction. Many spouses and dependents will not qualify for significant premium tax credits because their household income is too high. And, many employees and their dependents will find an employer’s group health plan to be of greater value than individual health insurance coverage due to the employer’s contribution and the employee’s ability to pay their share of the premium with pre-tax dollars.

How does an employer implement the new permitted election change?

An employer must amend its cafeteria plan to adopt the new permitted election change. At EBC, we make this easy for clients by updating our BESTflex Plan Document, Summary Plan Description (SPD), and Permitted Election Change form. EBC clients will be notified about these updates.