Q: In early March, we had an employee attempt to cancel his medical insurance because he became eligible for cheaper coverage through his wife’s new employer. He enrolled in his wife’s coverage, effective March 15. The problem is he failed to hit “Submit” within our benefits system when terminating our company’s coverage.
By the time he noticed in May that premiums were still being deducted from his paycheck, the 30-day “life event” window to terminate coverage had passed.
Are we allowed to go ahead and accept his cancellation based on the fact he tried to cancel but didn’t realize he failed to drop coverage?
A: While regulations for cafeteria plans do not address how to handle mistaken elections, IRS officials have frequently commented that elections may be corrected when there is clear and convincing evidence of a mistake. Mistakes can even be corrected retroactively.
Ultimately, the IRS leaves the decision of whether or not to correct an employee’s mistake up to the employer. Factors to consider include the employee’s past elections and benefits usage; reasonable evidence of a clerical mistake; assessment of the employee’s truthfulness; time elapsed; changed circumstances experienced by the employee; and other evidence of a mistake. Some resources recommend requiring the employee to provide a sworn statement as to the nature of the mistake and his or her intended election.
In your scenario, there is evidence the employee enrolled in other coverage and went into your system around the same time. This is pretty compelling proof of his intent to cancel coverage. If he didn’t file any claims with your health plan after April 15th, that would be supporting evidence as well. That said, it is your call and you should take into consideration whether this is how you want to handle similar mistakes in the future.
As for the effective date of the change, it should be after he went into your benefits system and no earlier than March 15th. If you require benefits to terminate at the end of the month, then I would recommend terminating his coverage effective March 31, 2021.
We also recommend adopting written guidelines for when a mistaken election is corrected. Then apply those guidelines in an objective and consistent manner and document all decisions.