When is an OK time for an employee to drop their medical insurance? Can an employer force an employee to keep their health insurance?

An employee can voluntarily cancel coverage at any time only if the company is not having employee premium contributions deducted pre-tax.

When premiums are deducted pre-tax, it means the employee has a Section 125 Plan and cannot change that election until Open Enrollment or a Qualifying Life Event.

So, generally speaking, no, an employer cannot force an employee to keep their health benefits or insurance.

Penalties

Purchasing a health insurance policy is strictly optional, according to federal law. However, there are consequences to canceling a current health insurance plan when an employee opts not to replace it with another plan. People choosing to opt out of health plans (self-insure) may have to pay a fine when they file their income taxes.

Also, five states—Massachusetts, New Jersey, Vermont, California and Rhode Island—and the District of Columbia may fine people who do not have medical insurance coverage.

What is a Section 125 Plan?

Section 125 health insurance plans, also known as "Cafeteria Plans," are employee benefits programs that take advantage of section 125 of the Internal Revenue Code. These types of plans allow employees to pay for certain qualified expenses (like health insurance premiums) on a pre-tax basis. That is, they're paying with money that isn't taxed. This helps reduce their total taxable income and increases their take-home income. There are two different types of Section 125 plans.

Premium Only Plan

Employers may deduct the employee's portion of the company-sponsored insurance premium directly from said employee's paycheck before taxes are deducted.

Flexible Spending Account

Employees may set aside (on a pre-tax basis) a pre-selected amount of money per plan year. The employee can use their FSA funds to pay for qualified out-of-pocket expenses, medical expenses, or dependent care, but not insurance premiums.

Insurance Plans in Action

Here is an illustration of how a pre-tax benefit works.

Basic Salary Calculation Without Pre-Tax Contributions:

• Gross monthly salary: $3,000
• Monthly health insurance premium: $200 (paid post-tax)
• Taxable income: $3,000
• Taxes at 20%: $600
• After-tax salary: $2,400
• After-tax salary minus insurance premium: $2,200 (final take-home pay)

Salary Calculation With Pre-Tax Contributions:

• Gross monthly salary: $3,000
• Monthly health insurance premium: $200 (paid pre-tax)
• Taxable income: $2,800 ($3,000 minus $200)
• Taxes at 20%: $560
• After-tax Salary: $2,240 (final take-home pay)

By using pre-tax dollars to pay for the health insurance premium, the employee's taxable income is reduced. In the second example, the employee pays $40 less in taxes ($600 - $560) due to the reduced taxable income and that goes into their take-home pay.

When Can I Cancel My Health Insurance at Work?

There are a few reasons why an employee might be wondering, "Can you cancel health insurance at any time?"

• Alternative coverage. If the employee gets new family coverage under a spouse's or domestic partner's health plan.
• Cost concerns. If the employee cannot afford the premiums with their current health insurance plan. This may be risky since medical costs without a health insurance can be substantial.
• Changing to a marketplace coverage. The employee might qualify for subsidies or prefer a plan from the Health Insurance Marketplace.
• Aging into Medicare. When the employee turns 65 or qualifies earlier due to disability, they may opt for health coverage through Medicare.

How Can I Drop My Employer Health Insurance at Any Time?

Can you cancel employer health insurance at any time? We've learned that it depends on a few different factors. Let's say that you can (because it's not a POP or FSA). Now the question remains: how?

The insurance cancellation process through an employer typically involves a few steps, but the exact process can vary depending on the company and the specific insurance plan. Generally, here's how to cancel health insurance through an employer:

1. Contact your HR or benefits administrator. Reach out to your company's human resources department or the benefits administrator to find out about the process.
2. Review your policy. Check to see if your employer-sponsored health plan only allows changes during the annual open enrollment period. If so, exceptions can be made for a qualifying life event like marriage, birth of a child, or loss of other coverage. This is a "Special Enrollment Period."
3. Complete the necessary paperwork. Your HR or benefits administrator will likely provide you with forms or direct you to an online account or portal to request the cancellation.
4. Submit and confirm. After submitting your request, follow up to ensure it was received and processed. Verify the date your health insurance plan will end.
5. Consider other coverage. If you're canceling your employer-sponsored plan, line up another form of health insurance coverage to avoid potential gaps.
6. Stay informed. Some employers might have policies about returning to the plan or penalties for canceling outside of the enrollment period, so make sure you're fully informed before canceling your existing coverage.

If you're looking for the inside scoop on benefits administration and health care, check out more of TriNet's helpful resources. If you're looking for a professional employer organization that can help you with all aspects of benefits and HR administration, consider partnering with TriNet.

Helpful Links:

• Cancel Your Marketplace Plan – Healthcare.gov
• Exemptions from Healthcare Fee – Healthcare.gov