• Code Section 125 election change rules: Section 125 of the Internal Revenue Code of 1986, as amended (Code) establishes the rules by which an employee can choose between receiving compensation in cash or as qualified (i.e., pre-tax) benefits. The most common Section 125 benefits (also called "cafeteria plan" benefits) are pre-tax payment of premiums, health flexible spending account (FSA) benefits, and dependent care assistance program (DCAP) benefits. The general rule is that Section 125 elections, once made, must be irrevocable during the plan year (the "irrevocability rule"). Accordingly, the Section 125 rules permit mid-year election changes only under very limited circumstances. And, importantly, the Section 125 rules do not specifically allow for election changes to correct an error. Failing to strictly adhere to the Section 125 election change rules could result serious adverse tax consequences for both the employer and employees.

However, IRS officials have indicated — in informal, non-binding comments — that certain mistakes may be corrected if there is clear and convincing evidence of the mistake. For example, the employee elects $2,850 of FSA benefits during open enrollment, but a data entry error by the employer results in a $285 election being input into the system. This is clearly an employer error that the IRS likely would view as correctable without violating the irrevocability rule. Another example: an employee makes an election for DCAP benefits, but has no children or other qualifying dependents. This also may be a correctable error, depending on the facts and circumstances.