Open Enrollment FAQs

Employee welfare benefit plans are generally offered on a plan year basis. At the end of each plan year, an open enrollment is offered to give eligible individuals the opportunity to change their benefit elections. Below are a series of frequently asked questions (FAQs) commonly associated with open enrollment.

Q1: Open enrollment is over, but an employee requested to change their election for the next plan year before it begins. Is this allowed?

A1: Most employers permit employees to pay for benefits on a pre-tax basis through the employer’s §125 cafeteria plan. §125 of the tax code generally requires elections to be irrevocable for the duration of the plan year, but permitting an election change before the plan year begins is not a violation of this rule. Therefore, it is generally up to the employer to determine whether this practice will be permitted.

However, before deciding to permit an election change once open enrollment has ended, the employer should verify the insurance company or stop-loss carrier will allow the change. In addition, consistency is important. If an employer permits a change for one employee under certain circumstances, they should do the same for all similarly situated employees.

Q2: The new plan year has begun, and an election error is discovered. What can be done to correct the error?

A2: The IRS has informally commented that an employer may correct an election where there is clear and convincing evidence that the election was the result of a bona fide mistake. Employer, employee and third-party mistakes can potentially be corrected using the bona fide mistake exception. Common examples of mistakes include when the employee elected the wrong contribution amount; the employee elected the wrong benefit (e.g., a dependent care FSA instead of a health FSA); the employee forgot to enroll a dependent; etc.

It is generally up to the employer to determine whether there is sufficient evidence of a mistake and, if so, whether to allow a correction for the mistaken election. There should be some objective evidence to support that the election really was a mistake rather than the employee simply changing their mind. For example, if the employee elected a benefit that was of no use to them (e.g., a dependent care FSA when they have no qualifying dependents); the election is inconsistent with the employee’s regular elections in prior years; or the election is inconsistent with other elections made in the current year (e.g., the employee elected a general-purpose FSA in addition to electing to contribute to an HSA)).

The main difference between a mistaken election and other election change events is that the election is corrected back to the start of the plan year. The employee should be placed in the position they would have been in had the mistaken election never been made. This could include the following actions:

• Undoing previous pre-tax contributions, reporting them as taxable income and withholding the appropriate payroll taxes;
• Taking additional pre-tax deductions to catch up on contributions that would have occurred under the corrected election;
• Refunding contributions as taxable compensation that are still held by the employer for any benefits that are dropped; or
• Collecting repayment from the employee for any claims that have been reimbursed that exceed the amount collected through payroll.

Because the mistaken election is undone back to the start of the plan year, ideally the mistake should be identified and corrected as early in the plan year as possible, but there is no explicit time limit on how late in the year mistaken elections can be corrected.

Finally, just because it might be possible to correct the employee’s pre-tax election does not mean the insurance carriers on the underlying benefit plans will allow the change. Especially where the employee is looking to add coverage that was not previously elected, or to switch between plan options, the employer should verify with the insurance carrier ahead of time if they will permit the change.

Q3: Are outstanding waivers cause for concern?

A3: Applicable large employers (50 or more FTEs) should be able to prove that coverage was offered to full-time employees to avoid employer shared responsibility penalties. However, there is no requirement to require employees to sign a waiver. Proof that coverage was offered at least annually is adequate. For example, proof of delivery of enrollment materials along with clear instruction about when and how to enroll is what is important. A waiver provides firm proof that the offer was made and waived, but if the employer has other proof so show that the offer occurred, a waiver is not required; it is common that employers default to a waiver for employees who fail to take any action.

NOTE: In some cases, the carrier may require waivers, or lack of waivers may negatively impact whether the employer meets the carrier’s participation requirements.

Q4: What happens when an employee fails to provide dependent verification?

A4: While dependent verification is not required (an employee’s attestation of dependent eligibility is generally adequate), for employers who choose to make verification a condition of enrollment, employers should clearly communicate what documentation is required and a deadline to provide dependent verification along with a statement that failure to provide the documentation will result in denial of dependent coverage. If an employer provides an exception to the verification requirements for one employee under certain circumstances, they should do the same for all similarly situated employees.

If the employer allows enrollment while the provision of documentation is pending, the employer likely cannot retroactively terminate coverage for dependents once the plan year begins as the ACA prohibits rescissions of coverage unless fraud or intentional misrepresentation are involved. However, if the employee is unable to produce the required documentation within a reasonable deadline set by the employer, coverage could be terminated prospectively, and it would not trigger a COBRA continuation right for the terminated dependent.

Q5: The carrier/TPA sent an amendment to the benefits booklet effective at the start of the new plan year. When must this be distributed?

A5: Even if a document required by ERISA is not “late”, there is case law prohibiting enforcement of exclusions and limitations in a modified document that has not been disclosed. Therefore, it is generally suggested to distribute notification of plan changes as soon as possible. In most cases, benefit booklets and schedules of benefits are incorporated by reference as a part of the summary plan description (SPD) to provide plan specific details. The SPD is required to be provided within 90 days of the start of the plan year for new enrollees. Further, the SPD must be up to date and accurate, which may be achieved by attaching an amendment to the SPD or updating the SPD. Further, for participants who are not newly enrolling at open enrollment, a summary of material modification (SMM) or an updated SPD needs to be provided within 60 days of start of the plan year for a material reduction in benefits or services; or within 210 days after the end of the new plan year for all other modifications.

Q6: What options should COBRA qualified beneficiaries be offered at open enrollment?

A6: Qualified beneficiaries (QBs) have the same open enrollment rights with respect to COBRA continuable benefits as similarly situated actives employees. Therefore, employers must provide the same open enrollment materials to QBs as are provided to active employees, although they can limit the information to benefits that are COBRA continuable. Further, if similarly situated active employees can enroll in new plans and add new dependents, so can QBs. However, health FSAs are only required to be offered until the end of the current plan year, if they are required to be offered at all (only required for underspent health FSAs).

Q7: An employee who was required to provide coverage for a dependent pursuant to a Qualified Medical Child Support Order did not elect coverage for the dependent in the next plan year. Is this allowed?

A7: The employee is required to provide coverage for the duration of time the order is in effect, so the employee should not be permitted to forego enrolling the dependent in coverage at open enrollment. In addition, as employee enrollment is necessary to permit coverage for the dependent, the employee will not be able to drop coverage at open enrollment while the order is still in effect.

Q8: How should HSA contributions be handled if an employee fails to open their account?

A8: For employee contributions, ideally, employers should not take any deductions from an employee’s pay until the employee’s account is established. If deductions are taken even though an HSA account has yet to be opened, the employer should return deductions as soon as the error is discovered.

For employer contributions, if any, the employer is typically not required to contribute to an employee’s HSA if the employee did not open their HSA account by the time the employer made HSA contributions. If open enrollment materials do not contain clear deadlines, the employer might consider sending out follow-up communication with a deadline and the consequences for failing to establish an account. It is important to note that if the employer does not permit employees to make pre-tax HSA contributions through the employer’s §125 plan, HSA comparability rules apply requiring the employer to follow a specific process to ensure that all employees receive the employer’s HSA contribution.

Q9: Can a plan year be longer than 12 months?

A9: No.

ERISA prohibits plan years in excess of 12 months, although a short plan year is permitted for valid business reasons. So, for example, to transition to a different plan year, it would be necessary to run a short plan year during the gap; it is not possible to extend a plan year beyond 12 months to handle the transition.

Similarly, §125 rules prohibit plan years in excess of 12 months and require at least an annual opportunity for employees to make election changes. §125 rules allow “default” or “rolling” enrollments that would default the employee into the same election they currently have so long as employees are given the opportunity to make a change if they want to do so at least once every 12 months.

Finally, applicable large employers (50 or more FTEs) are required to make an offer of medical coverage at least annually to full-time employees to satisfy the employer mandate.

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