Q: After our Welcome Back Orientation, we had an employee indicate she wished to drop our health coverage effective January 1, 2015, and purchase an individual policy on the exchange. Is this allowed, as our insurance renews October 1?
A: In short, yes, it is allowed. Your insurance company should allow an employee or an employee’s dependent to cancel his or her group health insurance at any time.
That said, it is important to note two items.
First, if your school’s group health insurance plan meets both minimum essential coverage and affordability vis-à-vis the ACA, then neither your employee nor his or her dependents will be eligible for a tax credit.
Second, if your employee is having the group medical insurance premium pretax through a cafeteria plan, he or she will not be able to change the cafeteria plan election. The employee will still have the funds for the group health plan withheld for the remainder of the plan year, and therefore these funds would be forfeited. Also note, the employee cannot pretax individual premiums, even those purchased on the exchange. So, your employee would essentially be paying double for health insurance and only receiving one policy.
Allow me to elaborate on Section 125 rules for just a moment.
For noncalendar year cafeteria plans in 2013, there was an allowed election change for health insurance premiums allowing employees or dependents to drop their group health insurance and go to the exchange, or elect to go on the group health insurance so that they were covered for the individual mandate. The IRS clarified in Notice 2013-71 issued October 31, 2013, that this change was only available for 2013 noncalendar plan years.
Conversely, if your employee had an individual policy on the exchange and wanted to come on your group health insurance on January 1, it would be up to the health insurer to allow this. If the insurance company allows the change, the employee cannot pretax the premium as it is not an allowed election change.
For your employee, the decision comes down to what makes the most financial sense.
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