IRS guidance covers Section 125 health coverage changes


The IRS recently released guidance (Notice 2022-41) permitting additional election changes for health coverage under Section 125 cafeteria plans. The notice expands the application of the permitted change-in-status rules by allowing participants to revoke the employee’s election under the plan for other-than-self-only (i.e., family) coverage under a group health plan—other than an FSA—in order to allow one or more family members to enroll in a qualified health plan through a health insurance exchange in the individual market. Under Notice 2022-41, employees may prospectively 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.


The IRS intends to modify the regulations under Section 125 to be consistent with the notice and final regulations issued under Section 36B in conjunction with notice. The Section 36B regulations 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.


Taxpayers may rely on the guidance for plan amendments allowing elections effective on or after Jan. 1, 2023. To allow the new permitted election changes under the notice, an employer must amend a cafeteria plan to provide for these election changes—but such an amendment cannot allow an election to revoke coverage to be made on a retroactive basis. An employer generally must adopt the amendment on or before the last day of the plan year in which elections are allowed, and the amendment may be effective retroactively to the first day of the plan year, provided that the cafeteria plan operates in accordance with the guidance under the notice and the employer informs participants of the amendment—and provided further that an employer may amend a cafeteria plan to adopt the 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 than begins in 2024.




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