Is financial hardship a Section 125 midyear election change event?

Assuming that the coverage is being paid for by the employee on a pre-tax basis, then no, unfortunately, the financial status of the employee would not be a qualifying event. Section 125 restricts the ability of an employee who has made a pre-tax election to make changes to that election in the middle of a plan year. Basically, an individual's election is irrevocable (unchangeable) during the plan year unless the individual experiences a recognized Section 125 midyear status change event (and even then, the plan document must allow the election change, and the election change must be on account of and consistent with the change event). Those recognized midyear election change events include:

• HIPAA special enrollment rights (acquisition of a new dependent through marriage, birth, or adoption; loss of eligibility for group health coverage, SCHIP, or Medicaid).
• Change in status (change in marital status, number of dependents, employment status, dependent satisfies or ceases to satisfy eligibility requirements or a change in residence).
• Change in cost of coverage.
• Significant cost change or coverage curtailment.
• Addition or significant improvement of benefit options.
• Change of coverage under another employer plan.
• Loss of group coverage sponsored by a governmental or educational institution.
• Court judgment, order, or decree.
• Enrollment, or expected enrollment, in a Qualifying Health Plan (QHP) on the health insurance exchange.
• Enrollment, or expected enrollment, in minimum essential coverage after dropping below 30 hours of service a week, regardless of whether eligibility for an employer's group coverage is lost.

There is no Section 125 change event for unaffordability or financial hardship. While the midyear events for changes in the costs of coverage (referenced above) might seem like they would apply, these events relate to changes in the cost of the coverage offered to employees, and not changes in the employee's personal financial circumstances that make the cost of coverage more burdensome on that employee.

However, if the coverage is not being paid for on a pre-tax basis, then Section 125 does not apply, and the coverage may be dropped as long as the carrier will allow it (if fully insured).

In summary, a Section 125 plan (whether a full plan or a premium-only plan) may not provide leeway for an employee to drop their pre-tax elections mid-plan-year due to financial hardship. Doing so places the entire plan at risk. The penalty for failing to comply with the regulations can be severe. The 2007 Proposed Treasury Regulations state that a plan that fails to operate in accordance with the Section 125 requirements is not a cafeteria plan, and employees’ elections between taxable and nontaxable benefits result in gross income to employees.

For further information on Section 125 midyear election events, please ask your broker or consultant for a copy of the PPI publication Midyear Election Change Events: A Guide and Matrix for Employers.