Section 125 Question

[Guest]

Why can't a participant cancel their policy (to replace with individual) except during open enrollment? Or can they? I've been told they cannot. Why not?

For an example, suppose they have a cancer policy with the duck on a section 125 and they want to replace it with an individual cancer policy from another company, but their "open enrollment" date is months away. Can they cancel anyway? If so, how? If not, why not?

I assume they have signed some kind of contract via the section 125 and the duck has their money in his bill for a year via payroll. Is there a way for them to snatch their freedom of choice back before the magic date? Or are they stuck with the duck (esp. if they become uninsurable)?

If I am correct in the above assumptions, could someone please provide the reasoning behind holding participants captive to the 125 plan? Is it like a group policy or something where the premium is dependent on the "characteristics" of the group? As an aside, I don't sell group health, but from reading the forum I assume someone can cancel their group major med health policy at any time of the year (to buy an IFP, for instance). If that is so, what is different about a section 125? I also understand the "pre-tax payroll deduction advantage" of a section 125, but that is a non-issue to my potential clients, now that they realize they have a (superior) choice between companies and products.

I've done a search of the forum and couldn't find an answer. I also searched the IRS site and couldn't make heads nor tails of what I found (no surprise there).

I don't care about debating the duck, specific policies, or the advantages/disadvantages of section 125, I just want to know how a section 125 works in relation to dropping and/or replacing policies with non- section 125 individual policies (less expensive if they leave the company, better benefits, better position to be in should they subsequently become uninsurable due to health or age). I have several folks who are not happy with their current quack, er, I mean agent, and want to move so that they can receive better products and service, but payroll says "quack!", er, I mean "No".

Thanks in advance for the help!

 

[somarco]

Section 125 of the IRC forbids changes in coverage off anniversary. Exceptions can be made (depending on the plan administrator) for qualifying events. Things like marriage, divorce, birth, adoption, loss of coverage are examples.

 

[LGilmore]

Is this a premium only plan or a true section 125 where pretax dollars are being payroll deducted each paycheck for claims?

What you really are running into is simply somebody is there before you. You either have to show where you can move the entire plan over or you're out of luck. the duck gives groups the 125 plans to self administer (which is a walking disaster, but most folks aren't going to complain).

The rules for addition and what you'd like to do is really up to the HR department or person. How much or how often do they want to f with it? Yes, there are some irs rules but really they don't pertain as much as the inconvience to the hr person. The group can decide if they want to honor things above and beyond the standards. It's done all the time, but in the same token anything above the minimum is by the generousity of the hr.

However, I don't think you are going to get an hr person to deal with all this stuff too often when they simply only have to write one check now for x premium. Do you really think they wouldn't mind keeping track of a b c d e f companies for one portion of the plan?

 

[DLA]

The inability to cancel mid-term is an IRS rule. As LGilmore has indicated, a company may choose to be out of compliance and allow a mid-term change, but in my experience, there aren't that many that will make that choice. And while IRS audits in not common, they do happen and I wouldn't want to be the person that created the out of compliance issue.

That said, I have a situation where the plan year with the duck is 12/01. The company has agreed to allow us to bring in a competing product eff 04/01. The competing product is still the same type of product, ie voluntary, but it is a "new" offering to the business in question.

Do we need to set up a new POP?

Back to the OP question, I think you are referring to replacing the coverage on a direct basis, not a payroll basis, correct? If that is true, by the letter of the IRS law, you are stuck until the prospect can cancel at open enrollment, unless they want to carry more than one policy, ie both the duck and your policy. What company are you writing with, BTW?

 

[Guest]

Thanks for the responses, Somarco and LGilmore!

Is this a premium only plan or a true section 125 where pretax dollars are being payroll deducted each paycheck for claims?

I'm not sure. I know the premiums for the policies are being payroll deducted, probably pretax. I'm not familiar enough about 125 to know about the claims being deducted. Is that money that is deducted after a claim is made, in addition to the premium? Is there a link to a website that explains that in a simple way? Thanks!

Do you really think they wouldn't mind keeping track of a b c d e f companies for one portion of the plan?

Actually, I'm not going in as worksite, but rather, taking a few folks off 125 and writing them individual policies.

So...there really wouldn't be any extra ongoing admin for HR just to drop someone off the duck group, would there? Would my best bet be to talk to the HR person?

As an aside, I'm running into these situations as I sell Life; I'm only looking to replace what they have in voluntary benefits, NOT replace any maj med health (I know better because of this forum). In fact, I always make sure they are properly covered with a good maj med health policy first. I'm just looking at bettering their position by replacing/adding cancer, accident, CI and DI, to round out their risk management with a better value proposition than what they have.

 

[somarco]

a company may choose to be out of compliance and allow a mid-term change,

Doing so disqualifies the plan for all participants. Can't imagine a company doing that.

JSF, you are suggesting replacing pretax premiums with after tax? How does that benefit your client?

 

[Guest]

Thanks for the response, DLA!

Back to the OP question, I think you are referring to replacing the coverage on a direct basis, not a payroll basis, correct? If that is true, by the letter of the IRS law, you are stuck until the prospect can cancel at open enrollment, unless they want to carry more than one policy, ie both the duck and your policy. What company are you writing with, BTW?

I write for AIG American General. That is correct, replacing coverage on a direct basis, not payroll. The good news is that one company's open enrollment is in May, so I can get some of those folks covered now, and they may overlap for only a month before they cancel their 125 coverage. I'm not looking to move a large number of people, just a few folks I know for whom it would be a better value long term. In fact, they see it's a better value and want it, but then HR says they can't replace until open enrollment. If it is not ethical or legal, then you are correct, I will not be the guy who causes non-compliance. Hey, that's why I'm asking on the forum! This forum rocks! (as has been stated by others before).

 

[Guest]

JSF, you are suggesting replacing pretax premiums with after tax? How does that benefit your client?

On the "back end": we pay more in benefits, and depending on the situation, could be substantially more (5 figures). On the "front end", the difference in premium between our non-PD and their PD is negligible. If they come off PD it's no contest. Also, the small tax savings they may give up in the short term is a small price to pay for the long term advantages of a stronger individual policy with greater value and benefits, that they own no matter how often they change jobs.

I'm still rather new at this, so thanks for the advice and I welcome any further comments, criticisms, and constructive ideas!

 

[Guest]

Doing so disqualifies the plan for all participants. Can't imagine a company doing that.

In that case, I will comply with HR and the IRS, keep in contact with my clients, and move them just before their open enrollment anniversary. That will take some organizational skills to keep the clients, companies, and open enrollment dates straight...

BTW, does anyone know of a good CRM / contact manager?

 

[LGilmore]

If it is premium only, a person can drop an insurance plan without penatly from the IRS. Happens all the time. The insurance product is not lock stepped with the concept. You can't hold a group to your insurance plan if they want to switch to another mid year (for better premiums), that has nothing to do with a pop plan. The IRS did not create those plans to lock companies into an insurance carrier for 12 months. They were created to allow a tax advantage for EE's. Whom they get the tax advantage from is immaterial. You can have a short plan year and restart a plan pretty much at any time. It comes down to the hassle the business wants to have.

Claim and daycare reinbursement is a different kettle of fish and again they really aren't dependent on the insurance product.

my point about a b c d e f companies was HR usually pays the premiums in one check and payroll deducts. Some of the HR's I've worked in could handle multiple carriers, but alot were of the "I only want to write one check" mindset.. didn't care about value, just didn't want to keep track of jack s... , but they had a nice chest.... {funny, a hot gal isn't that hot when she's messing up an account)

What is the product you're trying to replace? Life? why on earth would anyone pretax premiums for life, makes no sense. Takes away a primary benefit of LI.

Is it DI?

one thing you do mention your new at this. Take an after noon and read as much as you can on the subject.