Tax Issues Loom for Employers Fielding Late Enrollment Requests

Many employers sponsor health and welfare plans that require employees to elect coverage by a certain deadline to participate. Some late enrollment requests can be processed easily for life events such as marriage, divorce, birth, adoption, or new employment. Some plans also permit changes after open enrollment if the plan year hasn’t yet begun. But outside these circumstances, the rules get more complicated.

Tax Issues

Accommodating a late enrollment request could pose a problem if the plan intends to reimburse employees for medical expenses on a nontaxable basis under Section 105 of the federal tax code. It also could raise issues if it allows employees to pay for certain medical, disability, or accidental insurance coverage (among other benefits) on a pre-tax basis under Section 125 (the cafeteria plan rules).

Both tax advantages depend on employees having made irrevocable elections prior to the start of the plan year (with limited exceptions for newly eligible employees and employees experiencing life events described above). Failing to comply with these rules could cause the entire plan to lose its tax-advantaged status. As a result, absent qualifying life events, many plans don’t permit election changes after a specified deadline before the beginning of the year.

There is one informal exception to these rules that bears mentioning, though it’s limited: the so-called doctrine of mistake. This is raised in the context of Section 125 plans but might, depending on the circumstances, also apply to Section 105 benefits.

Under this doctrine, an employee’s cafeteria plan election can be corrected when there is clear and convincing evidence of a mistake. Employer errors, such as those attributable to data entry, data processing, or other administrative errors sometimes can be corrected retroactively under the doctrine.

Employee errors are harder to correct. These include typographical errors, lack of supporting documentation such as evidence of insurability, and election of incompatible benefits such as a health savings account and a low deductible health plan.

Some plan administrators apply an impossibility standard, under which employee errors can be corrected only if it’s impossible that an employee could have benefited from their election. This standard would allow a correction, for example, if an employee without eligible dependents mistakenly elects a dependent care flexible spending account. Other plan administrators apply a facts-and-circumstances standard for employee errors.

Without evidence of an impossible election, it may be difficult to show that an employee’s error satisfies the clear-and-convincing standard. Employers allowing elections corrections under the doctrine of mistake may want the employee to certify in writing about the nature of the mistake and the intended election.

Employers may adopt other policies to limit how frequently employees can avail themselves of the doctrine of mistake. They might require that employees bring any mistakes to their attention within a certain period from the beginning of the plan year, require employee confidentiality about the mistake and correction, or limit future corrections by the same employee for a period of time after the correction.

ERISA Issues

Accommodating an employee’s late enrollment request could pose other problems because ERISA requires that employers administer plans in accordance with the plan documents.

If the plan document explicitly permits or forbids the correction in question, the plan document must be followed. If the plan document is unclear as to whether the correction is permitted, the correction may be allowed if—considering the plan sponsor’s discretionary authority to interpret the plan terms—the correction could be construed as consistent with the plan terms.

Insurance Issues

Accommodating late enrollment requests also could pose contractual problems if doing so is disallowed under the terms of the employer’s contracts with its insurers. Insurers typically enforce enrollment deadlines to avoid adverse selection problems, among other issues, but might accept late elections on a case-by-case basis.

Employers should check with them before approving any such requests. Not receiving an insurer’s authorization before approving a late enrollment request without a qualifying event could leave the employer liable to self-insure the affected participant.

Best Practices

Employers may wish to develop detailed guidelines for processing late enrollment requests and review plan documents to ensure the correction rules reflect their intentions (and amend those rules if they don’t).

Requests to enroll in a health and welfare plan after the deadline and without a qualifying event should require careful documentation of the employer’s internal analyses and correspondence with the employee to ensure that decisions are applied consistently.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Alex Maged is an associate at Ivins, Phillips & Barker focused on employee benefits issues.

Percy Lee is of counsel at Ivins, Phillips & Barker focused on federal income tax, estate and gift tax, and employee benefits issues.

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