FAQ: Our insurance carrier has agreed to extend our coverage period for an additional two months. What are the compliance implications of a 14-month plan year?
October 13, 2020
Although insurance carriers are often willing to extend the insurance contract beyond 12 months, employers must consider what that will mean for the plan’s compliance. Specifically, the employer will have to consider what will need to be done to avoid violating the Section 125/Cafeteria plan rules, ERISA and the ACA.
Section 125/Cafeteria Plan
If employees are able to contribute towards their premiums on a pre-tax basis, then the plan is a Section 125/cafeteria plan. The Section 125 rules require employees to have the option to prospectively elect coverage for the “coverage period” (also called the “plan year”). The related rules state that a “plan year” must be 12 consecutive months, although there is an exception for a shorter plan year (if it's justified by a business purpose).
The plan year can begin on any day of any calendar month and must end on the preceding day in the immediately following year. So, if the employer has a cafeteria plan, the employer must allow employees to change their elections at the end of the plan year (i.e., prospectively elect or not elect coverage for the following plan year). This would mean that the employees would have to be given a chance to change their elections no later than 12 months after their last election.
Similarly, under ERISA, a plan year can be no longer than 12 months. The plan year must be identified in the SPD and the Form 5500 filing is based on a 12-month plan year (unless there is a shorter plan year).
The Form 5500 filing instructions make this clear when they mention that:
All required forms, schedules, statements, and attachments must be filed by the last day of the 7th calendar month after the end of the plan or GIA year (not to exceed 12 months in length)…
Thus, the Form 5500 filing would need to be completed for a 12 month period and could not be done for a 14-month period. Instead, the employer would likely have a 12-month ERISA plan year that would be followed by a two-month short plan year (or vice versa depending on the particular situation).
Employers with more than 50 employees are likely applicable large employers (ALEs) subject to the ACA’s employer mandate. Generally, an employer is an “applicable large employer” for a calendar year if it employed an average of at least 50 full-time employees on business days during the preceding calendar year. To comply with the employer mandate, a large employer must offer full-time employees minimum value, affordable coverage.
An employer makes an offer of coverage to an employee if it provides the employee an effective opportunity to enroll in the health coverage (or to decline that coverage) at least once each plan year. Treasury Regulation 54.4980H-4(b)(1) states:
An applicable large employer member will not be treated as having made an offer of coverage to a full-time employee for a plan year if the employee does not have an effective opportunity to elect to enroll in the coverage at least once with respect to the plan year.
As mentioned with the laws above, a plan year can be no more than 12 months. So, if a previously waived employee, who has not experienced a qualified event, is not given an annual opportunity to enroll in coverage — the employer will be considered to have failed to make an offer of coverage to the employee under the employer mandate and the employer would be at risk for a penalty.
The employer mandate requires an offer of coverage to be made at least annually, ERISA requires a plan year of no more than 12 months, and IRC Section 125 requires employees to have the option to make a prospective election for each coverage period (12 months). So even if the carrier is willing to extend the renewal date/contract “year,” the employer will likely need to host an additional open enrollment opportunity for the short plan year.