Marriott Asks for Clarification of Cafeteria Plan Regs

Sarah J. Curtis, on behalf of Marriott International Inc., Washington, has requested clarification of the temporary and proposed regs on cafeteria plans that allow plan participants to change cafeteria plan elections.

The suggestions primarily address the change in status rules. Curtis says that the new rules will force employers to not allow election changes even though other laws or company policies may require or permit employers to offer employees the opportunity to add dependents or otherwise change their elections.

====== FULL TEXT ======

February 12, 1998

Sharon Cohen, Esq.

Re: Comments Relating to Proposed Cafeteria Plan Regulations

Dear Ms. Cohen:

[1] On behalf of Marriott International, Inc. ("Marriott"), I write to comment upon and to request clarification regarding certain provisions contained in the temporary regulations regarding the circumstances in which cafeteria plan participants may be permitted to change their cafeteria plan elections (TD8738) (hereafter, the "Proposed Regulations"). Marriott also joins in the comments recently presented to you by John R. Hickman of Alston and Bird, LLP on behalf of the Employers Council on Flexible Compensation ("ECFC").

CHANGE IN STATUS RULES 1.125-4T(c)

1. CHANGE IN NUMBER OF TAX DEPENDENTS.

[2] The previous Code Section 125 status change regulations provided flexibility for employers to permit election changes in certain situations. The new rules establish six status change categories within which a change in status event must fall in order to qualify as a change in status. As a result, the new rules will force employers to not permit election changes in situations where other laws or company policies may require or permit employers to offer employees the opportunity to add dependents or otherwise change their elections. For example, the San Francisco domestic partner legislation requires certain employers to offer medical benefits to the domestic partners of their employees who frequently will not qualify as the legal dependents of such employees. Some companies operating in San Francisco are offering similar benefits even if the San Francisco ordinance does not apply to them. The new status change rules, however, limit status changes to the addition or loss of legal dependents or as required to comply with HIPAA's special enrollment rights which will not always cover this particular group of dependents for which coverage is mandated by San Francisco local laws.

[3] In addition, as addressed by the ECFC comments, employers that choose to extend benefits eligibility to non-tax dependents will lose the ability to permit election changes whenever an employee loses or gains a non-tax dependent under the Proposed Regulations. Although premiums for health care benefits for such non-tax benefits may not be offered on a pre-tax basis, employees who previously had employee only or employee plus one coverage and who then gain non-tax dependents would need to elect family coverage to cover their newly- acquired non-tax dependents if their employer does not offer dependent only coverage. If employees are not permitted to change their previous elections upon acquiring a non-dependent, then such employees may end up paying twice for health benefits in order to acquire coverage for their newly-acquired non-tax dependents by continuing to purchase coverage through the cafeteria plan in accordance with their previous cafeteria plan elections and then by purchasing after-tax family coverage to provide coverage for their newly-acquired non-tax dependents.

2. CHANGE IN JOB CATEGORY.

[4] As ECFC also noted, many employers limit eligibility for various benefits by job categories such as salaried/hourly or union/non-union as a matter of course. A category should be added to permit cafeteria plan election changes for employees who leave the union ranks to become nonunion employees or who transfer from salaried to hourly or vice versa to recognize this common event.

3. COLLECTIVE BARGAINING AGREEMENT PREMIUM COST CHANGES.

[5] Although the proposed regulations reserve treatment of the impact of significant cost changes, we submit that the increase or decrease in premium cost as a result of a new collective bargaining agreement or amendment of an existing collective bargaining agreement should be addressed in the Proposed Regulations because of the frequency with which such changes occur. As you may know, unions negotiate for changes in health benefit premium payments as part of the collective bargaining process with such new premiums to go into effect mid-year or at some other time which is often not consistent with the cafeteria plan's plan year. Employers and employees are not in a position to control the timing of the collective bargaining process and thus cannot always prepare for such unanticipated premium increases. Under the Proposed Regulations as currently written, union employees would be forced to pay for an increase in health benefit premiums on an after-tax basis or be prevented from reducing their pre-tax contributions when premiums decrease.

4. HIPAA RETROACTIVE COVERAGE.

[6] The new rules should address how to approach election changes which span two plan years such as retroactive HIPAA elections for births or adoptions.

[7] We appreciate your consideration of the above comments. If you would like us to suggest language to address the issues described above or to provide any additional information, please contact me at 301/380-4041.

Very truly yours,

Sarah J. Curtis

cc: Edward A. Rosic, Esq.