Our a client is an Ohio public school, not subject to ERISA. The group currently offers a variety of individual policies (accident, cancer/critical illness, hospital indemnity, disability, life) through a carrier that administers an FSA/DCRA and handles the administration of the group’s section 125 cafeteria plan at “no cost.”
We recently found group-based products through another carrier for these employee-paid benefits at a significant cost savings, while improving the coverage available to employees. However, we believe the current carrier will oppose making mid-year changes to the pre-tax Section 125 deductions (the new group carrier would take over 5/1 when all other benefits renew and the current benefits run through 12/31).
Q. Can the employer drop these insurance coverages mid-year?
A. One approach is for the group to say that the carrier for the same plans are changing, and as a result there is no drop in coverage, but a slight change to the employee premium. This may be the cleanest way to deal with the change, however this could get messy if the employer has not been including the individual coverage lines in its 5500 filing. If it has (presumably under a “wrap” plan), then this change is very clean.
Q. Would this fall under a “significant cost changes in coverage,” allowing the members to make changes mid-year? Is there a specific threshold that is deemed significant or is it up to the group and their interpretation?
A. Depending on the per-employee costs, it may or may not be significant – a $60,000 change for 6 months may be significant if there are 10 employees, but not if there are 100.
Q. This group is a public school and not subject to ERISA. Does that eliminate the secondary concern about the individual coverage lines in the 5500/Wrap Doc?
A. The fact that this plan is not covered by ERISA makes the issue more complicated. However, if the group’s intent is to keep the individual lines available for those who want them, and then add the group policies for those who want that, the group can rely on the “addition or improvement of a benefit package option” exception to the cafeteria plan rules. Under Treasury Regulation 1.125-4(f)(3)(iii), a cafeteria plan may permit eligible employees to change an election (or make a new election) if a plan adds a new benefit package option or other coverage option, or if coverage under an existing benefit package option or other option is significantly improved.
Our recommendation is to keep the individual lines available under the cafeteria plan (at least for this year) and then add the group policy and rely on this exception to permit employees to make a change. The current carrier, as the cafeteria plan administrator, should not refuse to administer the plan because of this change. However if they do, you should be able to readily find a replacement cafeteria plan administrator.
Q. Can a new FSA/DCRA provider take over for the current carrier mid-year?
A. Absolutely, based on the terms of your contract or arrangement with the current carrier.
Q. Are there any other thoughts or considerations we may have overlooked and should consider?
A. You are asking the right questions. Switching carriers mid-year is always challenging, and switching plan design (from individual to group policies) makes it trickier.
Responses to compliance questions provided by Kutak Rock.