How to Manage Open Enrollment Mistakes

June 30, 2022

Most of you have probably experienced the following scenario: An employee comes to you and says that they made a mistake during open enrollment, and they would like to make a change to their elections. If they realize their mistake and notify you before the beginning of the FSA or HRA plan year, you are permitted to make any change that they would like to make.

But what if the plan year has already begun?

If the employee has experienced a life event that is allowed under your plan and the election change the employee is requesting is consistent with the event, then a change can be made. Allowable events include:

  • Marriage, divorce, death of a spouse, legal separation, or annulment
  • Change in the number of dependents, including birth, adoption, placement for adoption, or death of a dependent
  • Any of the following events for you, your spouse or dependent - Termination or commencement of employment, a strike or lockout, commencement or return from an unpaid leave of absence, a change in worksite, or any other change in employment status that affects eligibility for benefits
  • One of your dependents satisfies or ceases to satisfy the requirements for coverage due to change in age, student status, or any similar circumstance
  • A change in the place of residence of you, your spouse or dependent that would lead to a change in status, such as moving out of a coverage area for insurance

As the employer, you do not have to permit all events allowed by the IRS. Refer to your FSA or HRA plan documents if you are unsure what your plan allows.

If the employee has not experienced a life event, then you must determine if the change requested is allowable. The IRS leaves this decision to the employer, so it is best to set standards and policies as to when a mistaken election will be corrected, apply those standards and policies in an objective and consistent manner, and document all decisions.

There are two approaches that you may choose to use to make this determination – the impossibility standard and the facts and circumstances standard:

  • The impossibility standard allows a correction only if it can be established that it was impossible for the employee to benefit from the mistaken election. This is the more cautious approach and is easier to administer because it does not involve examining employee motives and extrinsic evidence. An example of an allowable change under this approach is when an employee with no children asks to revoke their dependent care plan election.
  • The facts and circumstances standard allows errors to be corrected if the plan administrator can reasonably ascertain, based on facts and circumstances, that a mistake has actually occurred. This may require inquiry into employee intentions, although additional employee mistakes can be corrected under that standard so long as there is "clear and convincing evidence."

Based on informal IRS comments, clerical, arithmetic, and data-entry errors by employees can be corrected if there is clear and convincing evidence that the participant could not possibly have used the designated benefit during the plan year. This would not be a change in election; It would be an "undoing" of an election. (An example would be an employee who does not have children mistakenly enrolling in the dependent care plan.) On the other hand, a mistake as to a benefit's scope or tax treatment is unlikely to justify an election change. The rationale for the different treatment is that the IRS does not want to be in the position of determining intent.

To reduce the likelihood of an IRS challenge to a correction, it is best to adopt written guidelines for following the facts and circumstances standard. The guidelines should include:

  • How to apply the facts and circumstances standard. There should be clear and convincing evidence that a mistake has occurred. Factors to consider include the employee's past elections and benefit usage; plausible evidence of a clerical mistake (e.g., $5,000 input on the system could have been $500 or $50, but not likely $1,390); assessment of the employee's truthfulness; time elapsed since the first payroll date after the election was in force; changed circumstances experienced by the employee that might be evidence of reconsideration rather than clerical mistake; and other extrinsic evidence of a mistake. These factors should be applied on a consistent and nondiscriminatory basis.
  • The employee should provide a sworn statement as to the nature of the mistake and intended election.

  • Other items to consider: Establishing a time limit (e.g., 60 days) after the beginning of the plan year or close of the first payroll period when mistakes must be brought to the employer's attention; requiring confidentiality from the employee as to the mistake and correction (to the extent permitted by law); and imposing a ban on future corrections by the same employee for a period of time (e.g., three plan years).

Allowing employees to make changes to their elections outside these circumstances could result in hefty tax penalties and fines, as well as disqualification of the plan and loss of tax-preferred status for all participants. Therefore, we recommend that employers educate employees during open enrollment and advise them to give serious consideration to what elections they make before submitting their enrollment forms, Once a new plan year starts, it can be difficult, and sometimes impossible, to make changes to FSA or HRA elections.

It is also a good idea to provide employees with written confirmation of their elections after the close of each open enrollment period and before the new plan year begins. Employees should be instructed in writing to review their elections and advise the employer of any corrections that may be needed before the plan year begins.

What if the employer makes an error? IRS officials have consistently said that an employer administration or clerical mistake in recording an election can be undone if there is clear and convincing evidence that it was an employer error. This would include mistakes attributable to data entry, data processing, or other employer administrative errors. Such corrections may be retroactive.