Union Arbitration Decision

[Chaz]

Employer with union employees offered open enrollment period at end of 2010 for a new dental plan (calendar year plan). In 2011, a few employees stated that they never received the OE information and wanted to enroll or that they returned election forms but were not enrolled. Employer stated that employees could not enroll pre-tax because of the irrevocability rule but that it would allow these employees to enroll after tax (assume that the plan document permits after-tax elections) as an accommodation. The union states that is unacceptable and have filed a grievance.

Leaving aside that the employer is thinking about offering to gross-up the affected employees, in the event that an arbitrator determines (in a decision that is binding) that the employer must enroll these employees pre-tax notwithstanding the Code Section 125 rules, does anyone have any thoughts on whether these employees can enroll pre-tax mid-year under a "catch-all" exception to the irrevocability rule?

[QDROphile]

What is the "catch-all" exception?

The plan has to follow the law or suffer the consequences.

An arbitration can order an employer to do something, but it cannot change the the tax consequences of circumstances. In order to comply with the order, and employer might have to provide the economic equivalent of the impossible literal terms of the order and incur unanticipated (by the arbitration) cost to comply.

The arbitration may have included some factual determinations that the employer could work with to give effect to salary reduction elections that are delivered after the beginning of the year and be tax-compliant.

[Chaz]

What is the "catch-all" exception?

The IRS has indicated that in certain circumstances, such as clear and convincing evidence of employer or employee mistake, etc., employees may be permitted to make mid-year election changes even in the absence of the occurrence of a specifically enumerated exception to the general rule.

[QDROphile]

The factual determinations in the arbitration may help. The use of informal correction is subject to a lot of judgment and not all errors are elgible, to the extent we have indefinite informal guidance from the IRS.

[oriecat]

Couldn't you say that the irrevocability rule would only apply in the case of an employee having made an election, which would then be irrevocable, but in these cases the election was not made/not processed, in which case you are not actually changing an election.

[Chaz]

Couldn't you say that the irrevocability rule would only apply in the case of an employee having made an election, which would then be irrevocable, but in these cases the election was not made/not processed, in which case you are not actually changing an election.

I think I could do that if there was evidence that the election forms were not delivered to the employees or that the employees returned them but they were not processed but there is no such evidence. Here, the employer provided three opportunities for the employees to enroll, received no returned mail as undeliverable, and there is no evidence that any election forms were not processed.