QUESTION: Certainly one of our workers simply observed that her 2023 pay displays a wage discount for DCAP advantages. Initially, she mentioned she by no means elected DCAP advantages. However once we confirmed her the DCAP election on her election type, she responded that she had made a mistake in finishing the shape and requested if we might repair it. Can we do that beneath the IRS guidelines?

ANSWER: Probably, should you conclude that (1) there’s “clear and convincing proof” that your worker made a mistake; (2) the error is of a kind that may be corrected; and (3) the correction is acceptable. (Chances are you’ll want extra info earlier than you may attain these conclusions.) Whereas IRS cafeteria plan laws don’t handle election adjustments for errors, IRS officers have informally commented that an worker’s election could also be undone when there’s clear and convincing proof of a mistake. Some plans use an “impossibility” method for evaluating whether or not such proof exists, whereas others use a “info and circumstances” method. When the impossibility method is used, an election change is allowed provided that the proof signifies that it was not possible for the worker to profit from the mistaken election. For instance, you may undo your worker’s DCAP election if she has no qualifying people. This method is extra cautious and is less complicated to manage as a result of it doesn’t contain analyzing an worker’s intentions or motives.

With the facts-and-circumstances method, errors could also be corrected if the plan administrator can moderately verify {that a} mistake truly occurred. (This will contain inquiry into an worker’s intentions.) When this method is used, we recommend adopting and persistently following written pointers that require consideration of things akin to the worker’s previous elections and profit utilization (e.g., whether or not your worker has elected DCAP advantages prior to now or has persistently used her partner’s DCAP); believable proof of a clerical mistake (e.g., an worker would possibly simply write $5,000 as an alternative of $500, however it’s much less possible that $5,000 was written as an alternative of $2,400); evaluation of the worker’s truthfulness; proximity to the primary payroll date after the brand new election is in drive; and any change within the worker’s circumstances which may point out reconsideration relatively than mistake. As well as, we recommend acquiring a signed certification from the worker describing the error and the supposed election (e.g., if she supposed to elect well being FSA advantages as an alternative, the suitable correction can be an election of such advantages). A plan may also set up a time restrict for requests to right mistaken elections.

Beneath both method, if the clear and convincing normal is met, an worker’s clerical, arithmetic, and data-entry errors could also be corrected retroactively. (Word that the correction might also contain correcting mistaken payroll withholding.) However errors as to a profit’s scope or tax remedy usually can’t be corrected. For instance, your worker couldn’t change her election as a result of she mistakenly believed that the DCAP supplied better tax financial savings than the dependent care tax credit score.

To cut back the probability of election errors surfacing after the plan yr has begun, many employers present workers with written affirmation of their elections after open enrollment and earlier than the start of the brand new plan yr. Staff are instructed to evaluate their elections and notify the employer earlier than the plan yr begins if any corrections are wanted.

For extra info, see EBIA’s Cafeteria Plans guide at Sections XIV.U.1 (“Mistake: Clear and Convincing Proof Required”) and XXXVII.H (“Withholding the Unsuitable Wage Discount Quantities”).

Contributing Editors: EBIA Employees.