Comments Concerning Cafeteria Plan Regulations
Under Internal Revenue Code Section 125

III.  Comments

A.  Significant Cost or Coverage Changes

4. Substantial Change in Network Providers
    
5. 1. Explanation of New Rule

   2. Prop. Treas. Reg. §1.125-4(f)(3)(i) provides that if coverage under a plan is significantly curtailed during a period of coverage, affected employees may revoke their elections and may make new elections under other options providing similar coverage. Coverage under a health plan is significantly curtailed only if there is an overall reduction in coverage provided to participants so as to constitute reduced coverage generally.

   3. Concerns

   4. Many employers offer health coverage through HMOs and Preferred Provider Networks with a closed list of service providers for in-network services. In these cases, employees frequently choose a health care plan based on the availability of specific service providers. However, given the nature of the healthcare industry, it is increasingly common that large groups of providers or all providers in a particular geographic area may leave a particular plan during the course of the plan year. In such circumstances, it appears that the above provision would not allow a change in election during a period of coverage.

      Just as a large group of providers or all providers in a particular geographic area may leave a particular plan during the course of the plan year, large groups of providers also may join a plan during the course of the plan year. In such a circumstance, an employee may want to switch benefits package options, when a particular physician or group of physicians has become available to the employee. Prop. Treas. Reg. §1.125-4(f)(3)(i) does not permit mid-year election changes in these circumstances.

      In addition, employers may improve coverage under their health plan, introduce an additional network or a substitute network. Prop. Treas. Reg. §1.125-4(f)(3)(i) does not permit a change in election during a period of coverage consistent with these plan changes. Allowing employees to change elections in all of these limited circumstances, where the need for the change is triggered by circumstances outside the employee’s control, would not appear to violate the underlying objectives of the change in status rules (i.e., the limited exception from the constructive receipt rules).

   5. Recommendation

   6. We recommend that when finalized, the Proposed 2000 Regulations should be expanded to specifically allow an election change in the event of a substantial decrease or increase in the composition of the service providers of an HMO or Preferred Provider Networks with a closed list of service providers for in-network services. In addition, changes in elections during a period of coverage should be allowed if employers change the networks offered under their health plans or implement improvements to the coverage offered under their health plans.

      Because the events triggering the need for such change are beyond the control of the employees, we believe that allowing a change in election would not violate the underlying objectives of the permitted election change rules and would ensure the continued provision of quality health care to employees. Furthermore, such a change is already allowed in the case of a Dependent Care FSA. Based upon Example 5 of the Proposed 2000 Regulations at Prop. Treas. Reg. §1.125-4(f)(5), an employee-initiated, voluntary change in a daycare provider would allow such employee to change his or her Dependent Care FSA election.