If an employee experiences a qualifying event, do they have the right to switch benefit plan options (for example, from HMO to HDHP)?

The answer depends upon which qualifying event is involved, but yes, the employee has the right to switch benefit plan options under certain circumstances.

As a reminder, when an employer offers coverage through a Section 125 cafeteria plan, employee elections cannot be changed mid-year without a permissible qualifying event. It’s called the irrevocable coverage rule and applies any time employees contribute to the cost of health coverage on a pre-tax basis with salary reductions. There are two types of qualifying events: HIPAA Special Enrollment Rights (SER) and the optional Section 125 qualifying events.

The HIPAA SER events are:

  • Birth
  • Adoption
  • Marriage
  • Loss of eligibility for other group coverage
  • Loss of Medicaid or CHIP
  • Gain of eligibility for Medicaid or CHIP premium assistance program

Employees currently enrolled in the group medical plan who experience a HIPAA SER have the right to switch benefit plan options. For example, if an employee is enrolled in HDHP single coverage and gets married, they have the right to add the spouse and switch to a different medical plan option (such as an HMO plan). This is an entitlement under HIPAA. Neither the employer nor the insurer may deny the employee the right to switch plans under these circumstances.

Please note that the HIPAA SER rules don’t apply to stand alone dental or vision plans, which are generally excepted from HIPAA portability governance.

The second type of qualifying events are the optional events under Section 125:

  • Change in status (employment, marital status, number of dependents, residence)*
  • Change in cost (significant* and insignificant)
  • Significant coverage curtailment*
  • Addition or significant improvement of benefits package option*
  • Change in coverage under other employer plan
  • Loss of coverage sponsored by governmental or educational institution
  • Certain judgments, orders or decrees
  • Medicare or Medicaid entitlement
  • FMLA leaves of absence
  • Reduction of hours without loss of eligibility
  • Exchange enrollment

These events are optional for both an employer and an insurer. If an employer intends to permit mid-year election changes based on these events, their written Section 125 Plan Document would need to provide for such and the insurer’s policy would need to be in agreement. Those events identified with an asterisk allow for an employee to switch benefit plan options (including not only medical, but also dental and vision) based on the employer and insurer election rules. Where there’s overlap between the HIPAA SER and optional Section 125 rules (for example, between the HIPAA SER event of marriage and the Section 125 event of change in marital status), remember that the HIPAA SER events along with the right to switch medical plan options are an entitlement to an eligible employee and cannot be denied by employer or insurer practice.

Lastly, remember that employers must operate the plan in accordance with the Section 125 rules and their written Section 125 Plan Document. Allowing employee election changes outside of those guidelines would put the employer at risk for disqualification of the plan’s tax status. On the other hand, denying an employee a HIPAA SER could result in DOL enforcement, an IRS excise tax penalty or legal action against the plan.