Here's what I found
I found a document published in 2004 by Harrang, Long, Gary, Rudnick P.C. Attorneys & Counselors at Law and another by McGraw Wentworth that both said essentially the same thing. Here is an excerpt from the former:
"CAFETERIA PLAN DEVELOPMENTS
A. Correction of FSA Election Mistakes
In the context of a flexible spending arrangement (FSA) program, to error is human, to forgive is generally grounds for plan disqualification. It is a cardinal rule that once an employee has made an election under an FSA program for a year, he or she is not permitted to modify or revoke the election for that year, unless the individual incurs a so-called “qualified status event.” Mistakes, however, do happen, and even the IRS recognizes that. Accordingly, while neither the Internal Revenue Code nor the IRS regulations allow changes in elections to be made that were made by mistake, IRS officials have informally stated that, in certain instances, mistaken elections can be modified or revoked.
The standard to be applied in determining if a corrective election should be permitted is whether there is “clear and convincing evidence” that the FSA election was mistakenly made. In general, this standard requires employers to evaluate each claim on a case-by-case basis to scrutinize the underlying facts. Factors to be considered include the following:
· Whether there were any ambiguities contained in the FSA election materials;
· Whether the employee was new to the plan, and thus may not have understood the election procedures;
· How soon after the election effective date and the first deductions from the employee’s paychecks did the employee bring the mistake to the plan administrator’s attention; and
· How plausible is the mistake (i.e., had the employee in the prior year elected a $500 annual contribution, but elected $5,000 for the current year).
Erroneous elections prompted by mistakes of fact are more appropriate for correction. This would include, for example, an employee having elected coverage under a dependent care FSA when the employee has no qualifying dependents. However, the IRS cautions that a mere misunderstanding of the scope of the FSA program, or miscalculating the amount of reimbursable expenses to be incurred during a year, are not the types of mistakes that allow for corrective elections under a mistaken basis.
In all events, the decision to grant, or not to grant, a request for a change on the basis of a mistake is a fiduciary matter. Accordingly, the decision and the basis therefore should be
maintained in the plan records."
The example listed in the excerpt is almost identical to my own. The other document says something similar in a Q & A format:
"Q. An employee just noticed that his first paycheck for this year showed a deduction
for our medical flexible spending account. The employee chose to participate, but after reviewing the form, he realized he made a mistake. He had actually intended to elect our dependent care account. He simply recorded his election on the wrong line. I understand elections must be made in advance and can be changed only if family status changes, but I would like to help our employee. Can’t we simply correct the mistake? The employee will never be able to use the money on medical expenses; it is just too much.
A. You are correct that for most enrollment situations, Section 125 requires participants to make prospective elections and also limits mid-year changes to those necessary because of family status changes. It would be easy to assume your employee is stuck with the election made at open enrollment. In fact, Section 125 does not explicity allow employees to correct election errors. Even though the regulations (Prop. Treas. Reg. Sec. 1.125-4) do not allow election changes for mistakes at all, the IRS officials have informally commented that an employee’s election may be undone when the following conditions exist:
“Clear and convincing evidence” showing your employee made a mistake.
The mistake is of a type that can be corrected.
The correction is appropriate.
To evaluate whether such evidence exists, employers generally use the two approaches explained below:
“Impossibility” - This approach allows the change only if the evidence shows it was impossible for the employee to benefit from the mistake. In this case, unless your plan covers 100% of allowable expenses under your medical plan, there would not be enough evidence to support the contention that the employee could not benefit from the funds in the medical FSA.
“Facts and Circumstances” - This approach allows you to correct errors if, after an in-depth look at the employee’s situation, you can reasonably determine that a mistake was actually made. For example, let’s assume for the last three years your employee has elected the dependent care account and has chosen not to participate in the medical account. Also, let’s assume you have revised your form and the medical account election line is now in the same place the dependent care election line had been in the previoius year. The employee inadvertently chose the wrong option, but brought the error to your attention as soon as he received his first paycheck of the year. In this example, it is fairly easy to show how a mistake could be made.
If you decide to allow the correction, you should ask your employee to sign a statement describing the mistake and the intended election.
Under either approach, so long as the “clear and convincing” standard is met, employees’ clerical, arithmetic and data entry errors may be corrected retroactively. However, this guidance is informal. The IRS should address correction errors in the next set of final regulations regarding Section 125 plans."
An further resources anyone can fine would help me build my case.
