Q&A: Can Employees Drop Coverage Due to Second Job?

Question:

One of our employees recently asked to discontinue health, dental and vision coverages for himself and his family outside of open enrollment. He recently started a second job with an employer that offers the same benefits. He wants to enroll in their benefits because they are less expensive than ours. 

Should we allow him to drop his coverage at this time, or require him to wait until our next open enrollment in November?

Answer:

The answer to your question lies in the cafeteria plan regulations and your cafeteria plan document. Both specify the types of qualifying life events that enable employees to change their benefits elections mid-year. These events are officially called “changes in status” but are commonly referred to as “qualifying events.”

One qualifying event recognized by the cafeteria plan regulations is when an employee has a “change in employment status.” This is commonly understood to mean that the employee lost a job, started a new job, went on or returned from leave, or went from full-time to part-time (or vice versa).

It could reasonably be argued that your employee has had a change in employment status because he went from employed with one employer to employed with two employers. This probably isn’t what the IRS meant when they wrote the regulations, but the fact remains that the employee has had a change in employment status. With this change, he has become eligible for benefits through his second employer and asked to discontinue coverage under your benefit plans. Therefore, under a literal interpretation of the rules, it seems justifiable to allow him to make the change. Still, I recommend you consult your attorney to confirm.

Note that this answer is based on a couple of assumptions:

1. The employee’s premiums are withheld from his pay on a pre-tax basis (making them subject to cafeteria plan rules regarding allowable changes in status) AND;
2. You have a cafeteria plan or premium-only plan document recognizing a change in employment status as a qualifying event.

If either of these assumptions is incorrect, the answer could be different.