We have a premium only plan where we offer employees medical coverage only. First, is this considered a cafeteria plan? Is it governed by section 125? Second, can an employee drop dependent coverage without a qualifying event? If so, is COBRA required?

Are you pre-taxing the premiums?

The company pays for the cost of the employee's insurance. If the employee has dependents covered they pay the difference on a pre-tax basis.

If you are pre-taxing the employee's portion of the premium through salary reduction, then section 125 is the portion of the IRC which permits you to do so. So you need to comply with all the requirements of 125.

To clarify, dependents can be dropped for any reason, at any time, but they will not be eligible for COBRA, correct?

Since you are taking pre-tax contributions for dependent coverage, dependents can only be dropped under circumstances described in the 125 regs. A few (but not all) of those circumstances are qualifying events under COBRA. You have to look at the facts under both sets of rules.

TO CLARIFY, NO - dependents can not drop for just any reason. That is the only downfall of a 125 cafeteria plan. If you want the specifics let me know