Cafeteria plans may use an automatic enrollment process. An automatic enrollment process allows an employee's salary to be reduced each year to pay for a portion of the group health coverage under the plan unless the employee affirmatively elects to receive cash instead. The IRS approved the use of “negative elections,” also called “evergreen provisions” or “automatic enrollment,” in cafeteria plans in Rev. Rul. 2002-27 (2002-20 I.R.B. 925).

Eligible employees must have the opportunity to elect out of the plan and receive cash rather than contribute to the plan. Also, employers should confirm that the proposed automatic salary deduction is permitted under state law. Such plans may violate state laws requiring specific written authorization from an employee before making deductions for benefit plan contributions from his or her paycheck.

How automatic enrollment is typically used. It is important for employees to clearly understand their choices under a cafeteria plan. Often, rather than using automatic enrollment, an employer will require an active election at least once, and then allow further inaction by the employee to result in a default to the enrollment choice most recently elected for insured (including the employer's self-insured) benefits.

Negative elections are most frequently used for pretax payment of premiums, or for a default package of benefits if a participant does not submit his or her enrollment form on time. Participation in a flexible spending account (FSA) does not usually remain at a given level of participation on a default basis from year to year. Consequently, a participant should actively elect the amount to contribute to the FSA each year.

An opt-out cafeteria plan may boost enrollment by overcoming employee inertia. Moreover, it may prove to be a time-saver for a company's employee benefits personnel. Processing the paperwork for those employees who opt out may prove less cumbersome than processing applications from all employees who choose to be covered by the plan.