Don't Get Caught in the 30-Day Grace Period Myth: What Employers Need to Know About Making Changes to Cafeteria Plan Elections
One common misconception about cafeteria plans is the belief that there is a 30-day grace period to make changes to elections. This is not accurate. Once benefits become effective, elections are "locked in" and cannot be changed unless there is a special enrollment period as defined by IRC Section 125 or the employer is correcting an administrative error.
It's important to note that while some insurance carriers and cafeteria plan vendors may allow changes within the first 30 days, the IRS does not. Once coverage is effective, elections are irreversible, with the exception of special enrollment periods authorized under Section 125, such as changes in marital status, employment, work hours, or enrollment in a qualified health plan.
The IRS allows employers to correct administrative errors without jeopardizing the plan's tax-favored status, but there must be clear evidence that the change is to correct an error, not due to an employee changing their mind.
Making changes to an employee's cafeteria plan election without a special enrollment period or clear evidence of an administrative error may result in the entire plan being disallowed by the IRS, causing income tax liability for the employee and loss of tax benefits from the Section 125 cafeteria plan.
To ensure compliance with IRS regulations, it's crucial to understand the rules and regulations surrounding cafeteria plans and avoid common mistakes.