What obligation does an employer have to notify an employee, at termination, of the right to convert life insurance?

Section 125, the law that governs cafeteria plans, generally requires that elections be made prospectively, which means elections must be made before the effective date of coverage. There are two exceptions to this rule. The first is optional and is applicable to new hires if the employer has no waiting period (coverage is effective as of the date of hire). The second is required and is related to a HIPAA special enrollment right due to birth, adoption, or placement for adoption. As background, the section 125 rules are in place to dictate when an employee’s contributions toward health coverage can be taken on a pre-tax basis. HIPAA rules establish when mid-year opportunities, called HIPAA special enrollment rights, must be provided to enroll in coverage (whether coverage changes made mid-year are available on a pre-tax basis would be controlled by the 125 rules).

If an employer has no waiting period, they may choose to add a limited exception for new hires that allows the employee up to 30 days to make retroactive elections. These elections may be effective as of the employee’s hire date even though deductions for that coverage must be taken from compensation that is not yet earned. For example, an employer plan has no waiting period for new hires. A new employee is hired on March 15th. The new employee has 30 days to make an election, and does so on April 10th. Once the new employee elects coverage on April 10th, the employer goes back and adds coverage retroactively as of March 15th, which is paid for from compensation paid after the election (i.e., pay periods that occur after April 10th).

Under the second exception, the plan must allow retroactive coverage and payment for said coverage when a special enrollment right applies in the case of a birth, adoption or placement for adoption (if made within 30 days of the birth, adoption or placement for adoption). For example, an employee enrolled in the PPO plan gives birth on March 25th. An election to switch to the HDHP and add the newborn made by the employee on April 19th must be allowed retroactively to the date of birth (due to HIPAA portability). Additionally, the change in the premium contribution must also be allowed on a retroactive basis (since the election was made within 30 days of the birth).

Some employers mistakenly allow retroactive cafeteria plan elections for other HIPAA special enrollment rights (e.g., marriage). Employers are permitted to allow retroactive enrollments in other circumstances as long as the plan allows it, but the cost relating to the retroactive period must not be funded on a pre-tax basis. Using the example of marriage, this would mean that coverage for a newly acquired spouse could be retroactively allowed back to the date of the marriage, but the premium relating to coverage before the election is made must be paid with post-tax dollars, or paid by the employer.