Help! I enrolled an employee in an FSA plan erroneously!

Here’s a chance for you to interact with the blog editors from Thompson Publishing Group’s HR and benefits group. If you have a question or comment about flexible benefits cafeteria plan enrollment, send it along! In the meantime, here’s John Iekel, managing editor of the Flex Plan Handbook, responding to just that kind of question. See below.

Q: An employee has not elected to participate in an FSA plan but the employer enrolled them erroneously. What can be done?

A: The bottom line is that the plan administrator must correct its administrative errors.
The IRS has not issued any guidance on how to correct errors in flex plan administration. Because the tax Code and IRS regulations do not offer any guidance on how and when a plan administrator may correct errors, the administrator has some flexibility.
The key to taking advantage of this flexibility is to act consistently and in good faith. A plan administrator or employer that arbitrarily fixes some errors and not others could be open to an IRS challenge that it is not adhering to the Code’s limitations on flex plan elections.
Occasionally, the employer will withhold a greater or lesser amount from an employee’s paychecks than the employee elected for the FSA or DCAP. The employer should correct this error.
If the employer, plan administrator or employee discovers before year-end that the employer has withheld too much from an employee’s paychecks, the employer should halt its withholding until the error is corrected. If the error is not discovered until after the end of the plan year, reimbursements should be limited to the amount of withholding elected and over-withheld amounts should be repaid to the employee in the subsequent year as income for that year.
Written policies and procedures that describe when and how the plan administrator will correct administrative and employee errors could add a layer of protection to the plan administrator’s actions.