February 04, 2020
The IRS recently released an information letter that reiterates the election change rules under Section 125 of the IRC, which applies if employees are allowed to pay premiums on a pre-tax basis. The IRS letter responds to an inquiry concerning a DCAP participant who wanted to make an election change due to “a disrupted or unforeseeable childcare environment” that occurred outside of the plan’s open enrollment. Although the letter doesn’t go into any greater detail on the inquiry, the IRS does reiterate the Section 125 rules.
Specifically, they confirm that election changes must be made before the start of the plan year, and participants may not change their election mid-year unless they experience a qualifying event. Additionally, the letter explains that the plan may allow employees to change their election mid-year if the participant experiences a significant change in coverage or a significant increase or decrease in the cost of coverage. However, the plan is not required to do so, and the plan must be operated in accordance with plan terms.
This letter does not provide any new or updated information, but it does serve as a good reminder to employers that they must follow Section 125’s qualifying event rules. They may choose whether to recognize the IRS’ permissible qualifying events, but it’s important that the events they recognize be reflected in the plan document and that the employer not allow for employees to make mid-year changes without experiencing one of the plan’s permissible events.
IRS Information Letter »