Employers should consider all the facts and circumstances surrounding the enrollment change request before taking any action. The timing of the request related to the plan year will influence what the employer may allow.
Requested Change Before the Plan Year Begins
Employers can allow election changes after open enrollment ends and before the coverage effective date (e.g., the new plan year). Employers should have a policy in place for how they will handle these requests. Allowing changes after open enrollment closes but before the plan year begins allows the employer to catch errors before the coverage period begins. It also allows employees to catch their own mistakes such as neglecting to enroll a dependent or enrolling in a dependent care FSA instead of healthcare FSA. As part of its policy, the employer should set parameters around election changes. For example, the employer may want to only allow changes if the employee can show evidence of a mistake rather than just buyer’s remorse. It can be difficult to judge if a mistake actually occurred, so employers must do their best to be impartial and apply the policy on a consistent basis.
Allowing these changes also helps in situations where an employee and spouse have different open enrollment periods. For example, an employee may make an election during their open enrollment period and would then like to change it once the spouse’s open enrollment begins. Often employees have to make enrollment decisions without knowing the spouse’s benefit options and allowing flexibility may benefit employees. If an employer chooses to allow these changes, they need to ensure they follow their internal policy and apply the rules on a consistent basis. The employer could set requirements around when change requests must be received or set a deadline where no changes can be made after a specific date to ensure enrollment requests are timely handled. Of course, employers should always confirm any enrollment deadlines with the carrier(s) or TPA and ensure these parties are agreeable to and will administer the post-enrollment requested changes.
Requested Change After the Plan Year Begins
Once the plan year begins, the rules change. Under Section 125 plan rules, the employee's election must occur prior to the coverage effective date, and the related deduction should come out of a future paycheck. Section 125 also states that employees should not be able to change their elections after the effective date of coverage (i.e., during the plan year) unless the employee experiences an allowable midyear election change event (often referred to as a qualifying life event). There is a lack of formal guidance from the IRS as to whether an employee can correct a true mistake, but generally, if there is clear and convincing evidence a mistake occurred, the employer may be able to take steps to place everyone back in the position they would have been absent the mistake. Clerical or data entry mistakes from the employer may fall into this “true mistake” category. Similarly, if the employee could not have benefitted from the election (such as enrolling in a dependent care FSA when the employee does not have a child), it may be considered “clear and convincing” evidence of a mistake. Employers need to exercise prudence when reviewing employee election change requests once the plan year has begun.
In addition to Section 125 rule concerns, under ERISA, the employer should administer the plan according to the plan terms and in the best interest of plan participants and beneficiaries. Allowing changes once the plan year has begun that are not “clear and convincing” mistakes may be problematic. So, for these reasons, the employer should not allow election changes for any period following the effective date of coverage without careful review of the facts and circumstances surrounding the request.
Accordingly, due to the lack of formal IRS guidance regarding the recognition of mistakes and related corrections, the employer should consult with legal counsel for additional guidance. Generally, to avoid Section 125 and ERISA compliance issues, the best practice is not allowing employees to change their elections once the coverage period has begun and once salary has been taken from their paychecks unless there is clear evidence of a mistake.