Is leaving incarceration or being incarcerated a qualifying event under a Section 125 Cafeteria Plan?

Assuming the employer allows pre-tax deductions through a cafeteria plan, leaving incarceration or being incarcerated would generally not be considered a qualifying event permitted under the Section 125 rules. As background, Section 125 only allows employees to make one election annually unless they experience a qualifying event. Becoming incarcerated or released from incarceration would only trigger a qualifying event under Section 125 if the incarceration affected plan eligibility or somehow gave rise to one of the other qualifying events.

Specifically, if the incarceration makes a dependent ineligible for coverage (perhaps under the carrier’s contract), the “dependent ceases to satisfy eligibility requirements” change in status event under Section 125 would possibly apply.

A “change in residence” event could also apply if the incarceration or release from incarceration somehow affected the individual’s eligibility (again, possibly stated under the carrier’s contract). In other words, the move to or from prison would have to affect the employee or dependent’s eligibility for coverage under the employer’s plan. For example, if an individual moved into the plan’s service area after he wasn’t in the plan’s service area while incarcerated, there would be an argument that a qualifying event would occur when he’s released. However, this event rarely applies because most plans (unless it’s an HMO) provide benefits for out-of-area/out-of-network services.

Additionally, there’s a HIPAA special enrollment right for those who lose other coverage. However, this special enrollment right applies to those who lose other group health coverage. So, if an individual were covered under some type of inmate health plan, then it wouldn’t likely be considered a group health plan and the enrollment right wouldn’t apply.

Therefore, if a participant’s or dependent’s plan eligibility isn’t altered by becoming incarcerated or leaving incarceration or by a change in residence, it appears no Section 125 event would apply and the employee could not change his/her election until the next open enrollment period, or until he/she experienced some other qualifying event. Thus, an employer should review the carrier contract for eligibility requirements and permit a change only if a qualifying event applies and the Section 125 plan document allows for it.

Also keep in mind that although leaving incarceration rarely permits an employee to make an election change under an employer’s Section 125 plan, an individual leaving incarceration does indeed experience a special enrollment period in the health insurance marketplace for purchasing individual coverage.