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This web site has been updated to agree with the latest changes to Section 125 Regulations and the Proposed Section 125 Regulations. On August 6, 2007, the Internal Revenue Service withdrew all prior Section 125 Notices and replaced them with a new set of regulations providing comprehensive guidance on Section 125 Regulations. Some of the new regulations include new definitions of qualified and nonqualified benefits, change of status regulations, general rules on election, flexible spending accounts and substantiation of expenses, and non-discrimination.

2007 Proposed Section 125 Regulations Document

This web site previously had been updated to agree with the 2001 changes to the Final Section 125 Regulations and the Proposed Section 125 Regulations issued on January 10, 2001. Below is a synopsis of the changes.

The final regulations clarify the circumstances under which an employee can change elections during the plan year. These regulations are effective for cafeteria plans beginning on or after January 1, 2001, apart from the following exceptions which are mandatory for cafeteria plans beginning on or after January 1, 2002:

  • Clarification on changes relating to judgment, decree, or order requiring coverage for employee's child.
  • Rules relating to cost or coverage in paragraph (f) of the regulations.

In addition to changing our entries based on the clarifications for cafeteria plans effective on or after January 1, 2001, we included the mandatory changes for cafeteria plans effective on or after January 1, 2002. While these exceptions are not mandatory until 2001, they can be relied on now.

As the result of the changes to the Final Regulations, changes were made to the Proposed regulations, withdrawing Section 1.125-2 Q&A-6(b),(c), and (d), and amending Section 1.125-2 Q&A-6(a) and Section 1.125-1 Q&A-8.

What changes were made by these regulations?

Following is a list of some of the clarifications and changes made by the regulations:

  • HIPAA Special Enrollment Rights: Retroactive election changes are only allowed for changes resulting from birth, adoption, or placement for adoption submitted within 30 days.
  • Health FSA coverage cannot be adjusted based on change in cost or coverage of a health plan.
  • Group Term Life and Disability: Participants can now increase or decrease their coverage for any Change of Status event (not just change in marital or employment status) even if eligibility is not gained or lost.
  • AD&D: The rules for Group Term Life and Disability also apply to coverage to which § 105(c) applies. This should mean that, as far as changes in status, AD&D is to be treated the same as Group Term Life and Disability in regard to change of status rules.
  • Cost changes (significant or not significant) can result from actions taken by the employee, such as going from full-time to part-time, in addition to actions taken by the employer.
  • Changes in election can result from both cost increases and cost decreases. If there is a significant cost decrease, an employee with similar coverage can revoke the similar coverage and add affected coverage. All eligible employees can add affected coverage even if they have not previously participated in the cafeteria plan.
  • For changes resulting from Significant Curtailment of Coverage, IRS make a distinction depending on whether or not the curtailment constitutes a loss of coverage. Loss of Coverage is defined as complete loss of coverage under the benefit package option or other coverage option (such as HMO ceasing to be available where employee reside or employee losing coverage because of overall annual or lifetime limitation). In any significant coverage curtailment, the employee can drop the curtailed coverage and elect similar coverage, but the curtailed coverage cannot be dropped if there is no similar coverage unless it meets the definition of Loss of Coverage.
  • If coverage under a benefit package option is significantly improved, eligible employees who have similar coverage can drop the similar coverage and elect the improved option or elect the coverage even if the employee has not previously made an election.
  • The category for changing the employee's election in response to changes under the coverage of the employee's spouse or dependent has been changed. Now the rule applies to any employer plan of the same employer or any plan of a different employer. Also, the regulations now allow the employee to elect participation in a cafeteria plan if the employee (or employee's spouse or dependent) loses coverage under a group health plan sponsored by a governmental or educational institution.
  • When a judgment, decree, or order requires coverage of code § 152 dependent to be provided by spouse, former spouse, or other person, the coverage for the affected dependent cannot be dropped unless the coverage is actually picked up by the spouse, former spouse, or other person.
  • When an employee transfers out of an HMO service area, the employee can change to similar coverage or drop the coverage altogether. Note that this is the only time that an employee is permitted to drop the coverage when similar coverage exists.

You can view the 2001 Final and Proposed Section 125 Regulations by following the links below. They can also be reached from the corresponding links in the navigation on the left of this website.

Section 125 Change of Status Regulations
Preamble to Final Section 125 Regulations
Preamble to Proposed Section 125 Regulations
2001 Changes to Final Section 125 Regulations
2001 Changes to Proposed Section 125 Regulations