Misled employee in regards to qualifying event

Paige · May 2003

I'm afraid I've made a grave error. We have a husband, a wife, and their daughter employed by our company (no, the error was not that we allow nepotism, although this incident just makes it clearer to me that it should NOT be allowed) and the wife carries all of them on her insurance. We have a 2-tiered insurance plan--single and family.

Last year, the daughter got engaged and the mom inquired to me as to whether she could change her coverage mid-year so that she and her husband could carry their own individual insurance coverage (which would be much cheaper than her carrying the 2 of them on family coverage). I told her I wasn't sure because of the pre-tax status (there's been so many changes taking place with the IRS regs--I didn't know if it would qualify or not) and that I would look into it. Well, I forgot to look into it.

Now it's time for her daughter to get married and I asked our TPA if the wife could drop coverage on her spouse since she would no longer need to carry her daughter and it would be cheaper for them to have individal coverage. The TPA said that it was not a qualifying event. Yikes!!

Can anyone think of any "loopholes" to get me through this one? I'm readng through a cafeteria plan guide and there's several scenarios on what would be considered a qualifying event. I'm just not sure if I can fit this situation into any of them.

Thanks for any guidance anyone can provide.

Don D · May 2003

I'm afraid I do not see a loophole for the family members as a qualifying event does not seem to exist. Don't look at yourself as the blame for this convoluted scenario. It's the family who made a choice to complicate the situation and its the daughter who decided to marry and attempt to change the coverage around. The daughter won't be able to attach to either parent's coverage once she's married. It would seem to me that at open enrollment, each of the three family members must opt for individual coverage, unless your plan says one must carry the other, in which case the woman can continue to carry her husband. But the inherited son-in-law will need to fork up, or have his employed wife fork up for him, and I can't imagine that your plan will continue a married employee on their parent's plan. So, you overlooked a request to look into something. Your answer would be no different then than it is today, so they have suffered nothing. I think just for comfort I would ask the TPA to send me a written response to the question advising what their options are once the marriage occurs and what they are at open enrollment.

Paige · May 2003

Thanks, Don. If a loophole can't be found, it's nice to know that I can at least get support and a good 'ole "keep your chin up" from my colleauges. x:-)

Good idea on the written notification.

Pearce · May 2003

The daughter will lose her eligibility as a dependent on the mother's coverage when she is married. This will give the daughter the ability through HIPAA's special enrollment provisions to enroll in her own coverage with the employer, assuming that she is otherwise eligible and previously declined coverage when she was intially eligible because of her status as a qualified dependent. The parents have no ability to make a change due to the daughter's marriage and must wait for open enrollment.

crawfod · May 2003

I'm curious as to how old the daughter was when covered by her mother? Under most health plans once a dependent reaches age 19 and is no longer a full time student, they become ineligible to be covered as a dependent. Unless you employ minors, if I read your post right, this daughter must have reached age 19 sometime before she got married. She should have been dropped then. What's the story there?

While I respect TPAs, if you really want to help your employees, I'd see if I could get another opinion from the IRS. I think it is clear the daughter has had a life event entitling her to add her husband or at least separate from her mother's coverage. I think you could look at the mother and say she has had a change in her coverage situation and upon looking at the plan options again now realizes that covering her spouse is no longer a logical cost. I suppose there are horror stories of what the IRS can do to employers who honestly interpret the 125 plan differently than how the IRS feels it should have been done, but I really don't know. If you were ever audited, I would like to think making an honest misinterpretation would not result in penalties.

Paige · May 2003

>I'm curious as to how old the daughter was when covered by her mother?
> Under most health plans once a dependent reaches age 19 and is no
>longer a full time student, they become ineligible to be covered as a
>dependent. Unless you employ minors, if I read your post right, this
>daughter must have reached age 19 sometime before she got married.
>She should have been dropped then. What's the story there?
>

The daughter has been a full time student so she has been able to remain on her mother's coverage.

crawfod · May 2003

Paige, so the daughter was a full time student and also a full time benefit eligible employee at the same time? Interesting! Must have been tough going to school full time and then working assumably a full workweek.

Do Section 125 plans normally allow employees to drop out of plans or drop dependents at any time, without necessarily a life event? I had a TPA say people can drop coverage at any time for any reason; it's adding coverage that requires the life event. That's not the way I've been interpreting the IRS rules, and I have told our employees they can't add or drop without a life event except at open enrollment time. Have I been wrong to deny the drop question? Does it depend upon the wording of each 125 plan?

If employees can drop someone at any time, then your mother employee should be able to drop her spouse. Then, because he has lost coverage, he should be able to enroll as a newly covered member on his own.

Like I said in my previous post, some could interpret the daughter's legitimate life event to be an opportunity for the mother to rearrange her entire elections, which could be dropping her spouse too.

Let's suppose you had a male married employee who covered his spouse under your plan, and she works somewhere else. They have a baby. In my opinion, if the mother wants to now cover herself and their baby under her plan, then your male employee is entitled to drop coverage on his wife. The life event was still the baby being born, but I feel the employee has more than the option to only add the baby. I feel it represents an opportunity to review his entire health insurance elections and make a new decision.

Paige · May 2003

Whew--so many questions!

With Section 125s, you cannot drop out or drop dependents UNLESS there is a life event. The information from the TPA is incorrect if they are referring to a section 125. If the employee is enrolled in insurance and elected NOT to have the premiums come out on a pre-tax basis, then they could drop it anytime. So you have not been wrong to deny the drop question (unless the premiums were not pre-taxed).

125 guidelines also state that any changes made have to be as a direct result of the life event. With the daughter losing full-time status, that in no way affects how the 2 parents should be covered except as a cost issue. 125s do not let you drop coverage simply because of cost--there are several other things to consider. There has to be a significant increase in cost. In the case here, there is no increase in cost for the mother. There is an alternative that would allow her to pay less money, but there is no increase in cost.

There is also something called the Consistency Rule stipulated in the guidelines. The change in benefit elections must be "on account of" and must "correspond with" a change in status that affects eligibility for coverage under the plan. If a dependent ceases to satisfy eligibility requirements for coverage, the employee's election to cancel coverage for any other dependent or spouse fails to correspond with that change in status and would violate the consistency rule.

Obviously, guidelines can be interpreted in different ways. I think the IRS is making strides towards making the guidelines somewhat clearer than they have been--ultimately, IF we were ever audited, I could make a case for certain situations, but it's going to be up to the IRS and their interpretation of the guidelines.

juju · May 2003

Our company offers a special (slightly discounted) rate to married employees with children who choose the "Family - 2 Employee w/children" option, as opposed to the "Family" option, in which only one parent works for us. In our case, if only one child was covered, and that child lost eligibility, I think the parents would HAVE to select other coverage since they would not qualify under the original level of coverage any more. However, this is the only case I can think of where that would apply.

As far as an employee's wife dropping coverage under him when their baby is born, that doesn't fall under the consistency rule. Adding the baby would be consistent with the life event change. Dropping the wife would not.

Leslie · May 2003

Paige, I don't know about your plan, but with ours it is much less expensive for the company to have two married ees on an ee +1 plan than it is for each to carry individual coverage. As such, we ensure that the premium for the carrying spouse of married ees is the same as the cheaper premium for two individual coverages.

Our premiums are four-tiered (ee, ee +1, ee + 2 or 3, ee + 4 or more). Thus if a married couple were in the situation of yours, their premium would drop from the rate of ee + 2 or 3, to the rate of ee +1. Our premiums do run through a 125 while the medical plan is self funded.

Paige · May 2003

Ours is only a 2-tier plan. I realize things would have been much simpler if it were otherwise, but unfortunately, we don't have that option.

Misled employee in regards to qualifying event

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