January 28, 2025

The answer is generally no. Although carriers will sometimes tell employers they can make changes within 30 or 31 days of the plan year beginning, that doesn’t give employees carte blanche to change their minds and choose new elections.

Under IRC Section 125, 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 have the ability to change their elections after the effective date of coverage (i.e., during the plan year) unless the employee experiences a qualifying event. Under ERISA, the employer should operate/administer the plan according to the plan terms, relevant laws, and in the best interest of plan participants/beneficiaries. Therefore, for all those reasons, the employer should not allow election changes for any period following the effective date of coverage, even if the carrier indicates it is allowed. Rather, allowing election changes after the effective date could be viewed as a violation of Section 125 and ERISA. Accordingly, the practice of allowing those changes post effective date should generally be discouraged.

Occasionally, a situation will arise where the employer is informed that the employee made a mistake after open enrollment ended. Employers can, but are not required to, allow election changes after open enrollment and before the coverage effective date (i.e., the start of the new plan year). Some employers view this as a good practice to correct errors before the coverage period starts.

However, if the correction request occurs after the plan year begins, it is more difficult for employers. Employers should consider all the facts and circumstances surrounding the mistake before taking any action to correct it. Employers need to determine if a true mistake occurred or if it is simply an employee changing their mind.

There is a lack of formal guidance when it comes to correcting mistakes, but the general notion from the IRS is that if there's clear evidence of a mistake, then the employer can take steps to place everyone back in the position they would've been in absent the mistake. Whether the clear and convincing standard is satisfied depends on the nature of the mistake, including when it occurred and when it was discovered. Generally, employer clerical or data entry mistakes would qualify. Additionally, situations in which the employee could not have benefitted from the election are clear and convincing. For example, if an employee made a dependent care deferral election at enrollment but did not have a dependent, this seems rather clear and convincing evidence of a mistake.

Essentially, it is a facts and circumstances analysis. Factors to consider include:

• The employee's past elections and benefit usage.
• Assessment of the employee's truthfulness.
• Time that has 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 a mistake.
• Other extrinsic evidence of a mistake.

These factors should be applied on a consistent and nondiscriminatory basis and documented.

In the end, it would be the employer's decision as a plan sponsor to determine whether there is clear and convincing evidence of a mistake. However, the employer should consider the situation carefully before making exceptions because the employer has an obligation to follow the terms of the plan document. Additionally, the employer has an obligation to treat all eligible employees in a like manner. Finally, making an exception may also create an undesirable precedent.

If the employer chooses to recognize the mistake, the insurer or stop-loss carrier, as applicable, would need to agree. The Section 125 plan document should be reviewed to see if there is any language that addresses the correction of mistaken elections and if applicable, recoupment of amounts not withheld. The employer should also confirm that any necessary withholding from an employee's pay does not violate any state wage withholding laws.

Due to the lack of formal IRS guidance regarding the recognition of mistakes and related corrections, the employer should consult with counsel for 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.