Believe me, I don't blame you in the least for being frustrated.
I'm going to explain the reasoning here. Keep in mind I am explaining to you why LEGALLY there is no fraud or violation here. I'm not saying I don't see the justice in your position - I do. As I've indicated, my employer would let you fix it, and I suspect you're right that if the HR professional who left had not left, you wouldn't be in this position. However, what I would do is not binding on your employer.
IRS regulations are very strict on any pre-tax benefit. There can occasionally be some wiggle room on post-tax benefits but on any kind of pre-tax benefit the lines are very tightly drawn. And they are checked on. It is not a question of if an employer's pre-tax records will be checked; it is a question of when they will be checked. And if the auditor finds that the employer is not following the regulations, the entire plan, for the entire company, can be placed in jeopardy. Their right to offer a (in this case, FSA) can be withdrawn and all the employees who do want it, lose the benefit. This is stage one.
Stage two; ultimately, it is your responsibility to know what benefits you need/want and to make appropriate elections. It is not the responsibility of the employer to oversee your benefits and tell you what is and is not appropriate. You are supposed to make the appropriate elections off the bat. There are always going to be mistakes that occur, but the position the law takes is not that you must be allowed to make corrections; you may be allowed to make corrections in some cases and at some times. Also, the window to make those corrections tends to be very short. In your case, if your employer's plan is standard, the window to make the correction with minimal risk was up before you had even noticed the mistake yet.
Stage three, putting the first two together; Your employer is holding a tight line on the regulations regarding a pre-tax benefit. While you may be allowed to make the correction, they are not required to allow you to make it, and they *could* be held liable for a legal violation if they do. Whether they would or not depends on how tight a line the auditor took. I doubt that the right to offer an FSA would be withheld for a single violation of this type, but it is not at all outside the realm of possibility that they'd be fined.
I want to give you a couple of examples of the sorts of things we're dealing with. Some years ago at a different employer I was trying to write a policy about a benefit that is managed at the state level, and we had employees in two states. My state required that we manage it one way (which was better for the employees) and the other state gave us the freedom to choose whether to manage it that way or another way (which was more favorable to the employer). My CEO and COO wanted us to do it the second way, and I kept trying to explain to them that they way they wanted to do it was illegal in my state. Finally, in desperation, I called my state DOL, explained my problem, and asked if there was any way I could write the policy the way the CEO wanted and still be in compliance with state law. They summed it up thusly to me: "As you know, state law requires that you do X, and your upper management wants to do Y. As long as you also do Z, we will look the other way if your policy says Y, unless one of your employees complains to the us. If they do, we will have to find in favor of the employee since the law requires you do X and not Y. But in the absence of a formal complaint, we will pretend we don't see you doing Y as long as you do Z." In your case, X is holding the straight line as the employer is doing; allowing you to make a correction is Y plus Z - something they will pretend they don't see as long as it doesn't get caught in an audit.
Another example, this one on the point of individual responsibility; just this week I worked on a case where an employee was told what action he had to take to drop a (pre-tax) benefit. He was told, in writing, what materials we needed and what the time frame was to do it. The window in which to take action was 30 days. He applied for the material he needed, but had it sent to the wrong address, never followed up to see if it was received, never took the follow up action he was told he would have to do. But 37 days later, he called to find out why he was still being billed for the benefit. We did not allow him to make the correction - it was HIS responsibility to follow up. Now in your case, I know that you DID follow up; I'm not making the comparison for that reason. You did everything you could as soon as you knew. No, my point is that you did make the mistake in the first place. Innocently, I know - I'm not holding you at fault for a mistake. But if your employer allowed you to make a correction and then later on they had another employee like mine, who didn't do anything and then expected everyone else to bail him out, how would they justify a refusal with you as a precedent? You're looking at it very personally, which is quite normal, and why wouldn't you? But your employer has to look at the overall picture. With all of that in mind, can you see why it is not fraud or a legal violation to refuse to allow you to make a correction?
Again, I think your employer is pulling the line somewhat too strictly in this case. But do you understand why, when looking at the larger issue, it's not a legal violation or fraud on their part?