[Code of Federal Regulations]
[Title 26, Volume 2]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.125-4T]

[Page 537-541]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.125-4T  Permitted election changes (temporary).

    (a) Election changes. A cafeteria plan may permit an employee to 
revoke an election during a period of coverage and to make a new 
election only as provided in paragraphs (b) through (i) of this section. 
See paragraph (j) of this section for special provisions relating to 
qualified cash or deferred arrangements.
    (b) Special enrollment rights. A cafeteria plan may permit an 
employee to revoke an election for accident or health coverage during a 
period of coverage and make a new election that corresponds with the 
special enrollment rights provided in section 9801(f), whether or not 
the change in election is permitted under paragraph (c) of this section.

[[Page 538]]

    (c) Changes in status for accident or health coverage and group-term 
life. (1) In general. A cafeteria plan may permit an employee to revoke 
an election for accident or health coverage or group-term life insurance 
coverage during a period of coverage and make a new election for the 
remaining portion of the period if, under the facts and circumstances--
    (i) A change in status occurs; and
    (ii) The election change satisfies the consistency requirement in 
paragraph (c)(3) of this section (consistency rule for accident or 
health coverage) or (c)(4) of this section (consistency rule for group-
term life insurance coverage).
    (2) Change in status events. The following events are changes in 
status for purposes of this paragraph (c):
    (i) Legal marital status. Events that change an employee's legal 
marital status, including marriage, death of spouse, divorce, legal 
separation, or annulment;
    (ii) Number of dependents. Events that change an employee's number 
of dependents (as defined in section 152), including birth, adoption, 
placement for adoption (as defined in regulations under section 9801), 
or death of a dependent;
    (iii) Employment status. A termination or commencement of employment 
by the employee, spouse, or dependent;
    (iv) Work schedule. A reduction or increase in hours of employment 
by the employee, spouse, or dependent, including a switch between part-
time and full-time, a strike or lockout, or commencement or return from 
an unpaid leave of absence;
    (v) Dependent satisfies or ceases to satisfy the requirements for 
unmarried dependents. An event that causes an employee's dependent to 
satisfy or cease to satisfy the requirements for coverage due to 
attainment of age, student status, or any similar circumstance as 
provided in the accident or health plan under which the employee 
receives coverage; and
    (vi) Residence or Worksite. A change in the place of residence or 
work of the employee, spouse, or dependent.
    (3) Consistency rule for accident or health coverage. (i) General 
rule. (A) An employee's revocation of a cafeteria plan election during a 
period of coverage and new election for the remaining portion of the 
period (referred to below as an ``election change'') is consistent with 
a change in status if, and only if--
    (1) The change in status results in the employee, spouse, or 
dependent gaining or losing eligibility for accident or health coverage 
under either the cafeteria plan or an accident or health plan of the 
spouse's or dependent's employer; and
    (2) The election change corresponds with that gain or loss of 
coverage.
    (B) A change in status results in an employee, spouse, or dependent 
gaining (or losing) eligibility for coverage under a plan only if the 
individual becomes eligible (or ineligible) to participate in the plan. 
A cafeteria plan may treat an individual as gaining (or losing) 
eligibility for coverage if the individual becomes eligible (or 
ineligible) for a particular benefit package option under a plan (e.g., 
a change in status results in an individual becoming eligible for a 
managed care option or an indemnity option). If, as a result of a change 
in status, the individual gains eligibility for elective coverage under 
a plan of the spouse's or dependent's employer, the consistency rule of 
this paragraph (c)(3)(i) is satisfied only if the individual elects the 
coverage under the spouse's or dependent's employer. See the Examples in 
paragraph (k) of this section for illustrations of the consistency rule.
    (ii) Exception for COBRA. Notwithstanding paragraph (c)(3)(i) of 
this section, if the employee, spouse, or dependent becomes eligible for 
continuation coverage under the employer's group health plan as provided 
in section 4980B or any similar State law, the employee may elect to 
increase payments under the employer's cafeteria plan in order to pay 
for the continuation coverage.
    (4) Consistency rule for group-term life insurance coverage. Except 
as provided in this paragraph (c)(4), the provisions of paragraph 
(c)(3)(i) of this section apply to group-term life insurance coverage. 
In the case of marriage, birth, adoption, or placement for adoption, a 
cafeteria plan can allow an election change to increase (but not to 
reduce)

[[Page 539]]

the amount of the employee's life insurance coverage. In the case of 
divorce, legal separation, annulment, or death of a spouse or dependent, 
a cafeteria plan may allow an election change to reduce (but not to 
increase) the amount of the employee's life insurance coverage.
    (d) Judgment, decree, or order. This paragraph (d) applies to a 
judgment, decree, or order (``order'') resulting from a divorce, legal 
separation, annulment, or change in legal custody (including a qualified 
medical child support order defined in section 609 of the Employee 
Retirement Income Security Act of 1974) that requires accident or health 
coverage for an employee's child. Notwithstanding the provisions of 
paragraph (c) of this section, a cafeteria plan may--
    (1) Change the employee's election to provide coverage for the child 
if the order requires coverage under the employee's plan; or
    (2) Permit the employee to make an election change to cancel 
coverage for the child if the order requires the former spouse to 
provide coverage.
    (e) Entitlement to Medicare or Medicaid. If an employee, spouse, or 
dependent who is enrolled in an accident or health plan of the employer 
becomes entitled to coverage (i.e., enrolled) under Part A or Part B of 
Title XVIII of the Social Security Act (Medicare) or Title XIX of the 
Social Security Act (Medicaid), other than coverage consisting solely of 
benefits under section 1928 of the Social Security Act (the program for 
distribution of pediatric vaccines), a cafeteria plan may permit the 
employee to make an election change to cancel coverage of that employee, 
spouse or dependent under the accident or health plan.
    (f) Changes in status for other qualified benefits. [Reserved]
    (g) Significant coverage or cost changes. [Reserved]
    (1) Employer's plan. [Reserved]
    (2) Plan of spouse's or dependent's employer. [Reserved]
    (h) Cessation of required contributions. [Reserved]
    (i) Special requirements concerning the Family and Medical Leave 
Act. [Reserved]
    (j) Elective contributions under a qualified cash or deferred 
arrangement. The provisions of this section do not apply with respect to 
elective contributions under a qualified cash or deferred arrangement 
(within the meaning of section 401(k)) or employee contributions subject 
to section 401(m). Thus, a cafeteria plan may permit an employee to 
modify or revoke elections in accordance with sections 401(k) and 401(m) 
and the regulations thereunder.
    (k) Examples. The following examples illustrate the rules of this 
section. In each case involving an accident or health plan, assume that 
the plan is subject to section 9801(f) (providing for special enrollment 
rights under certain group health plans).

    Example 1. (i) Employer M provides health coverage for its employees 
under which employees may elect either employee-only coverage or family 
coverage. M also maintains a calendar year cafeteria plan under which 
qualified benefits, including health coverage, are funded through salary 
reduction. M's employee, A, elects employee-only health coverage before 
the beginning of the calendar year. During the year, A adopts a child, 
C. Within 30 days thereafter, A wants to revoke A's election for 
employee-only health coverage and obtain family health coverage, as of 
the date of C's adoption. A satisfies the conditions for special 
enrollment of an employee with a new dependent under section 9801(f)(2), 
so that A may enroll in family coverage under M's accident or health 
plan in order to provide coverage for C, effective as of the date of C's 
adoption.
    (ii) In this Example 1, M's cafeteria plan may permit A to change 
the employee's salary reduction election to family coverage for salary 
not yet currently available. The increased salary reduction could 
reflect the cost of family coverage from the date of adoption. (The 
adoption of C is also a change in status, and the election of family 
coverage is consistent with that change in status. Thus, under the 
change in status provisions of paragraph (c) of this section, M's 
cafeteria plan could permit A to elect family coverage prospectively in 
order to cover C for the remaining portion of the coverage period.)
    Example 2. (i) The employer plans and permissible coverage are the 
same as in Example 1. Before the beginning of the calendar year, 
Employee A elects employee-only health coverage under M's cafeteria 
plan. A marries B during the plan year. B's employer, N, offers health 
coverage to N's employees, and, prior to the marriage, B had elected 
employee-only coverage. A wants to revoke the election for employee-only 
coverage, and is considering electing family health coverage

[[Page 540]]

under M's plan or obtaining family health coverage under N's plan.
    (ii) In this Example 2, A's marriage to B is a change in status. Two 
possible election changes by A would be consistent with the change in 
status: to cover A and B by electing family health coverage under M's 
plan, or to cancel coverage under M's plan (with B electing family 
health coverage under N's plan in order to cover A and B). Thus, M's 
cafeteria plan may permit A to make either change in election. (M's 
cafeteria plan could also permit A to change A's salary reduction 
election to reflect the change to family coverage under M's group health 
plan in accordance with paragraph (b) of this section because the 
marriage would also create special enrollment rights under section 
9801(f), pursuant to which an election of family coverage under M's plan 
would be required to be effective no later than the first day of the 
first calendar month beginning after the completed request for 
enrollment is received by the plan.)
    Example 3. (i) Employee G, a single parent, elects family health 
coverage under a calendar year cafeteria plan maintained by Employer O. 
G and G's 21-year old child, H, are covered under O's health plan. 
During the year, H graduates from college. Under the terms of the health 
plan, dependents over the age of 19 must be full-time students to 
receive coverage. G wants to revoke G's election for family health 
coverage and obtain employee-only coverage under O's cafeteria plan.
    (ii) In this Example 3, H's loss of eligibility for coverage under 
the terms of the health plan is a change in status. A revocation of G's 
election for family coverage and new election of employee-only coverage 
is consistent with the change in status. Thus, O's cafeteria plan may 
permit G to elect employee-only coverage.
    Example 4. (i) Employee J is married to K and they have one child, 
S. A calendar year cafeteria plan maintained by Employer P allows 
employees to elect no health coverage, employee-only coverage, employee-
plus-one-dependent coverage, or family coverage. Under the plan, before 
the beginning of the calendar year, J elects family health coverage for 
J, K, and S. J and K divorce during the year and, under the terms of P's 
accident or health plan, K loses eligibility for P's health coverage. S 
does not lose eligibility for health coverage under P's plan upon the 
divorce. J now wants to revoke J's election under the cafeteria plan and 
elect no coverage.
    (ii) In this Example 4, the divorce is a change in status. A change 
in the cafeteria plan election to cancel health coverage for K is 
consistent with that change in status. However, the divorce does not 
affect J's or S's eligibility for health coverage. Therefore, an 
election change to cancel J's or S's health coverage is not consistent 
with the change in status. The cafeteria plan, however, may permit J to 
elect employee-plus-one-dependent health coverage.
    Example 5. (i) The facts are the same as Example 4, except that, 
before the beginning of the year, Employee J elected employee-only 
health coverage (rather than family coverage). Pursuant to J's divorce 
agreement with K, P's health plan receives a qualified medical child 
support order (as defined in section 609 of the Employee Retirement 
Income Security Act) during the plan year. The order requires P's health 
plan to cover S.
    (ii) In this Example 5, P's cafeteria plan may change J's election 
from employee-only health coverage to employee-plus-one-dependent 
coverage in order to cover S.
    Example 6. (i) Before the beginning of the coverage period, Employee 
L elects to participate in a cafeteria plan maintained by L's Employer, 
Q. However, in order to change the election during the coverage period 
so as to cancel coverage, and by prior understanding with Q, L 
terminates employment and resumes employment one week later.
    (ii) In this Example 6, under the facts and circumstances, in which 
a principal purpose of the termination of employment was to alter the 
election and reinstatement of employment was understood at the time of 
termination, L does not have a change in status. However, L's 
termination of employment would constitute a change in status, 
permitting a cancellation of coverage during the period of unemployment, 
if L's original cafeteria plan election was reinstated upon resumption 
of employment (for example, because of a cafeteria plan provision 
requiring an employee who resumes employment within 30 days, without any 
other intervening event that would permit a change in election, to 
return to the election in effect prior to termination of employment).
    Example 7. (i) Employer R maintains a calendar year cafeteria plan 
under which full-time employees may elect coverage under one of three 
benefit package options provided under an accident or health plan: an 
indemnity option or either of two HMO options for employees that work in 
the respective service areas of the two HMOs. Employee T, who works in 
the service area of HMO 1, elects the HMO 1 option. 
During the year, T is transferred to another work location which is 
outside the HMO 1 service area and inside the HMO 2 
service area.
    (ii) In this Example 7, the transfer is a change in status and, 
under the consistency rule, the cafeteria plan may permit T to make an 
election change to either the indemnity option or HMO 2, or to 
cancel accident or health coverage.

[[Page 541]]

    Example 8. (i) A calendar year cafeteria plan maintained by Employer 
S allows employees to elect coverage under an accident or health plan 
providing indemnity coverage and under a flexible spending arrangement 
(FSA). Prior to the beginning of the calendar year, Employee U elects 
employee-only indemnity coverage, and coverage under the FSA for up to 
$600 of reimbursements for the year to be funded by salary reduction 
contributions of $600 during the year. U's spouse, V, has employee-only 
coverage under an accident or health plan maintained by V's employer. 
During the year, V terminates employment and loses coverage under that 
plan. U now wants to elect family coverage under S's accident or health 
plan and increase U's FSA election.
    (ii) In this Example 8, V's termination of employment is a change in 
status. The cafeteria plan may permit U to elect family coverage under 
S's accident or health plan, and to increase U's FSA coverage.
    Example 9. (i) Employer T provides group-term life insurance 
coverage as described under section 79. Under T's plan, an employee may 
elect life insurance coverage in an amount up to the lesser of his or 
her salary or $50,000. T also maintains a calendar year cafeteria plan 
under which qualified benefits, including the group-term life insurance 
coverage, are funded through salary reduction. Before the beginning of 
the calendar year, Employee W elects $10,000 of life insurance coverage, 
with W's spouse, X, as the beneficiary. During the year, a child is 
placed for adoption with W and X. W wants to increase W's election for 
life insurance coverage to $50,000 (without changing the designation of 
X as the beneficiary).
    (ii) In this Example 9, the placement of a child for adoption with W 
is a change in status. The increase in coverage is consistent with the 
change in status. Thus, W's cafeteria plan may permit W to increase W's 
life insurance coverage.

    (1) Effective date. This section is applicable for plan years 
beginning after December 31, 1998, and on or before November 6, 2000.

[T.D. 8738, 62 FR 60166, Nov. 7, 1997; 63 FR 8528, Feb. 19, 1998; T.D. 
8878, 65 FR 15553, Mar. 23, 2000]