Employer Compliance Guide to 2027 Open Enrollment for Health and Welfare Benefits
It’s that season again when employers start preparing for open enrollment, the time when employees review their benefits choices for the next plan year. This period is crucial and often reveals the many intricate rules that govern employer-sponsored health and welfare plans. Here, we’ll explore five important legal aspects for employers and offer useful tips to help ensure compliance.
Annual Open Enrollment in the Workplace
- What is it? Open enrollment represents the set period when eligible employees can choose their employer-sponsored health and welfare benefits for the upcoming plan year. This includes options like health, dental, vision, life insurance, or other voluntary coverage for themselves and their dependents. Generally, this is the sole opportunity employees have to make these selections, with a few exceptions. They can also make choices during initial enrollment when they’re hired or become eligible, or during a special enrollment period triggered by a qualifying event that allows for mid-year benefit changes.
- When is it? Typically, the open enrollment window opens a month or two before coverage starts and spans about two to four weeks. For example, if an employer follows a calendar year for group health plans, they often conduct open enrollment in October or November, with coverage commencing on January 1.
- Why have it? Having a specific timeframe for all employees to make their benefit selections alleviates some of the administrative pressure on HR departments and is often necessary to meet compliance requirements.
5 Legal Considerations + Employer Takeaways for Open Enrollment Season
Here are some vital compliance points to consider during your organization’s open enrollment period.
1. Employer Mandate under the Affordable Care Act (ACA)
The ACA mandates that applicable large employers (ALEs) provide qualifying health coverage to their full-time employees and their dependents, or they may face potential penalties from the IRS, which are set to significantly increase in 2027:
- 4980H(a) Penalty. The penalty for not offering coverage will rise to $3,780 per full-time employee, excluding the first 30 employees (compared to $3,340 in 2026).
- 4980H(b) Penalty. The penalty for offering unaffordable coverage will increase to $5,670 per full-time employee who qualifies for a premium tax credit (up from $5,010 in 2026).
Your annual open enrollment is essential because:
- The IRS doesn’t consider an ALE to have made an “offer of coverage” unless the employee has a clear opportunity to enroll or decline coverage at least once each plan year. Determining whether coverage is “affordable” or meets the “minimum value” requirement of the ACA is another consideration.
- What constitutes an “effective opportunity” depends on various circumstances, including whether the employee was adequately informed about the coverage offer and had enough time to make a decision.
- This applies to offers of coverage for employees’ dependents as well, including qualifying children under 26. Notably, spouses and many other categories of children don’t qualify under the employer mandate rules.
- The IRS regards rolling elections (those that continue unless the employee opts out) as offers of coverage. Nevertheless, an annual open enrollment period is still vital since it allows employees to modify last year’s elections.
Employer Takeaways
- If you’re an ALE, ensure eligible employees have an “effective opportunity” to choose or decline health coverage (or revise elections from the previous year) for themselves and their qualifying children.
- If you’re not an ALE, verify if your health insurance carrier or union agreements require you to provide an open enrollment period at specific times.
2. Cafeteria Plans under the Internal Revenue Code (IRC)
A “cafeteria plan” under IRC Section 125 enables employees to pay for certain health benefit costs with pre-tax salary reductions. To maintain its tax-favored status, elections must generally be made prospectively and remain irrevocable during the plan year, barring a few exceptions approved by the IRS and the plan document. Similar rules apply to flexible spending accounts (FSAs) for health expenses.
Employer Takeaways
- Election Timing. Cafeteria plan elections should be finalized before the start of the plan year. You can choose the open enrollment timeframe most suitable for your organization, but make sure there’s enough time between the end of open enrollment and the onset of the new plan year for processing enrollments and necessary administrative work.
- Election Changes (Prior to Plan Year). If an employee requests a change after open enrollment but before the plan year starts, you may allow it if your plan permits. Just be aware this might set a precedent for future requests.
- Election Structure. You can require affirmative elections each year or implement default or rolling elections, but it’s important to clearly communicate the method and rules to employees in the plan documents.
3. IRS Limits for Account-Based Plans
Account-based health plans allow employees to set aside pre-tax funds for certain qualifying expenses, with the IRS establishing annual limits for these accounts. Employers can set lower limits but often prefer to maximize tax benefits for employees. Here are some examples:
- Health FSAs. For 2026, employees can contribute up to $3,400, and for plans allowing carryovers, employees may carry over up to $680 of unused amounts into the next year. The IRS has yet to announce limits for 2027, so stay tuned.
- Dependent Care FSAs. These accounts permit employees to use pre-tax dollars for qualifying child and dependent care costs, with a maximum of $7,500 ($3,750 if married filing separately) annually.
- Health Savings Accounts (HSAs). For 2027, the annual contribution limits are $4,500 for individuals with self-only high-deductible health plan coverage and $9,000 for those with family coverage. For more information, see Revenue Procedure 2026-24.
Employer Takeaways
- During open enrollment, be sure to update all materials with any new annual plan limits and include any employer contributions, if applicable.
- Clearly inform employees about which plans follow a “use-it-or-lose-it” rule (like health or dependent care FSAs) and provide information on carryover limits or grace periods, if relevant.
4. Open Enrollment Rights Under COBRA and the FMLA
An employer must offer the same open enrollment rights, such as switching plans or modifying family coverage, to each qualified beneficiary on COBRA during their active employees’ open enrollment period.
Similar rules apply under the Family and Medical Leave Act (FMLA). For instance, if a group health plan has an annual enrollment period for active employees, any employee on FMLA leave during this period must be given a chance to adjust their elections just like other employees.
Employer Takeaways
It’s important to recognize that your annual open enrollment applies not just to currently active employees; it can also impact those who are no longer employed or never were. Verify if any qualified beneficiaries receiving COBRA or employees on FMLA leave should be included in the process and provide them the same opportunities as active employees.
5. Required Disclosures Under ERISA and Other Laws
ERISA establishes fundamental disclosure guidelines for employee benefit plans, while a variety of other regulations like COBRA, the ACA, and HIPAA set additional rules for group health plans.
Employers with group health plans must ensure timely distribution of all necessary disclosures to the corresponding individuals, including plan participants, beneficiaries, and eligible employees, depending on specific disclosure requirements. The nature of these disclosures largely depends on factors like the types of benefits provided and whether the plan is self-funded or fully insured.
Employer Takeaways
- Some disclosures must accompany enrollment materials, such as a Summary of Benefits and Coverage. Find out what needs to be provided during open enrollment and ensure timely distribution, possibly coordinating with insurance carriers or other providers.
- Other disclosures might need to be provided shortly after coverage begins or upon request – often valid during open enrollment. For example, a summary plan description must be shared within 90 days after a participant gains coverage or within 30 days following a request. Consider being proactive in maintaining and updating required disclosures well before open enrollment.
- This period is also a good time to fulfill other disclosure requirements and review your organization’s policies, procedures, and plan documents to ensure they reflect any amendments in regulations or plan designs.
Check our detailed guide for information on which disclosures must be provided during open enrollment or the fourth quarter: Employer Guide to Q4 2026 Compliance Deadlines for Retirement and Welfare Benefit Plans.
Conclusion
If you have any questions about compliance with open enrollment, strategies, or best practices, don’t hesitate to reach out to your legal advisor, or any member of the Employee Benefits and Tax Practice Group. We’ll keep offering tips, guidance, and updates on employee benefits and workplace law topics.
