A Change Would Do You Good, But Do The Section 125 Cafeteria Plan Rules Permit It?
Inevitably, an employee will wake up from their holiday food coma and realize that they made a mistake in open enrollment. “But I didn’t mean to elect family coverage! My spouse is covering the kids this year!” Employers are allowed to set enrollment rules for their self-funded medical plans. One response to the employee is the hard line that the door was closed at the end of the enrollment period. But what if you want to be more flexible?
If the employee catches their mistake before the ball drops on New Year’s Eve, the IRS won’t care. But if the question comes up in January, it’s likely too late. The IRS’s rules on cafeteria plan elections don’t make any exception for mistake. Elections can only be changed if the employee has a change in status event like a divorce or new dependent.
Although not expressly permitted by the IRS, many advisors are comfortable with correction of true mistakes. For example, if an employee accidentally checked the wrong box on the form (the employee checked family coverage, but has never had any dependents), or there was a computer error, you might decide to put them in the position they thought they had elected.
But if it looks like the employee simply regrets their choice and wishes they had done something different, be very careful in allowing changes! You’ll be violating the Section 125 rules, possibly committing a fiduciary breach under the medical plan, and might be getting in hot water with your stop-loss carrier.
Finally, keep in mind that technically a cafeteria plan election is separate from the election to enroll in the medical plan. It might be possible to allow the employee to change their medical plan enrollment (adding coverage for a spouse, for example) as long as you’re not changing their pre-tax cafeteria plan elections (so the spouse’s coverage would have to be paid with after-tax dollars). However, this path is paved with potholes. Your stop-loss carrier might not respect the election, you are opening yourself up to a fiduciary breach or discrimination claim from those who aren’t allowed to make changes, and your payroll department may mutiny at the special handling that will be required.
Happy New Year!