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What to do about pre-tax payroll deductions when Employee is sick or i


Guest Ginny Rigsbee
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Guest Ginny Rigsbee

We have an employee that has had an illness and will probably be out for an undetermined amount of time....any leave she had accumulated is now used up and she is not generating a paycheck but we are holding her position. My question is what to do about pre tax deductions...mainly health insurance premiums, and some other Sec 125 items. When there is no paycheck to deduct from how do you obtain this money from the employee? Is it legal to just keep record of what is owed and then re start deductions when the employee resumes work? Thank you.

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Have you had any similar instance in the past that you can use as a precedent? I’m assuming not, otherwise you wouldn’t have posted. I also assume that your plan doc and/or any employee handbook does not address this at all. You will be setting a precedent here, so be prepared to offer the same solution to any other employee in a similar situation in the future. Without an employee handbook or anything else, the FMLA rules will still be helpful, since they are the standard out there. We need to be sure whether or not this employee was first using the “pay-as-you-go” option or not. For “pay-as-you-go”, employee contributions can be made post-tax or pre-tax from any compensation you pay the employee while on LOA. If the employee ceases to make payments, you could require that the employee begin paying with after-tax dollars to you following the regular payroll deductions, or you could recoup the money upon the employee’s return (catch-up option). Under FMLA, the catch-up does not have to be agreed upon prior to the LOA as long as the employer and employee were originally using the pay-as-you-go option. In your case, FMLA rules don’t directly apply, so I would think you would have no problem recouping the money when the employee returns.

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Guest Carolynn

I see another question regarding her Caf 125 benefits, Medical FSA in particiular. What if she makes medical reimbursement claims during the period that she is on LOA and then eventually terminates without returning to work. In that scenario, wouldn't her real term date be the date she went on LOA? Would her reimbursement amount have to be paid back? Handling LOA has been a tricky thing for me, a relatively new TPA.

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Guest Ginny Rigsbee

We all do the "pay as you go option".....and yes this is the first time I have ever had to deal with this as HR Manager....I had a similar circumstance when my husband was out on a workmans comp leave and I did not file for reimbursement on childcare expenses( I believe this falls under Flexible Spending though) I did not file for the money because my husband had no paycheck to deduct the childcare from...I to this day never understood exactly what happened with this....they said we had money left in our account but since it couldnt be deducted in the first place I didn' t think we were entitled to be reimbursed for money that was never deducted...

While we are on this subject....regarding pre tax deductions...on months when you have 3 pay periods in a month( this would apply to bi-weekly payroll people). after I deduct the monthly items from the first 2 paychecks I then let my employees have a "freebie" on the 3rd paycheck since they have already met what is due for the month...does anyone know if this is okay or should I be following annual amount divided by whatever so that each paycheck has a set amount deducted? I hope this makes sense.

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In the situation Carolynn describes, the employer should send a letter to the employee asking that the reimbursement be returned. But that's about all they could do. It serves as another example showing how important it is to have the policies documented and communicated to the employees. Pay-as-you-go is something used expecting the employee to return. If an employer pays FSA premiums on the employee's behalf while on LOA, and the employee never returns, then the FSA term date should be the day before the LOA.

Ginny, I have several clients who pay bi-weekly (26 pays), but only take payroll deductions on a twice-monthly (24) schedule. Not a problem.

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Guest Carolynn

Re: Pay as you go, would that be the pre-tax amount or after tax? Our documents address this - pay in advance or pay as you go - but you'd be surprised (maybe not) by the er's that don't seem to pay attention to those details. Seems their favorite method is pay back - the one method that is not mentioned in the document!

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Pay-as-you-go works with either pre-tax or post-tax dollars. If an employee has any vacation days, for instance, the deductions can be taken from that until it is used up. Those would be pre-tax. Payments made after all of those sorts of things are used up would then be post-tax.

I can tell you this:

The pre-pay option can't be the only option offered to employees (but it can be limited to FMLA employees).

The catch-up option can be the only option for FMLA employees as long as it is also offered to unpaid non-FMLA employees.

Pay-as-you-go has to be offered to FMLA employees if that option is offered to unpaid non-FMLA employees. Pre-pay and catch-up may also be

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Guest Ginny Rigsbee

Carolyn...we do everything that is allotted by the IRS...Pre taxed

IE....Health insurance, AFLAC plans, etc. Are there items that you do after tax? I thought the whole idea behind these types of plans was to save the employee and employer money. With this particular employee I think (now watch it come back to haunt me) that we are safe enough to let her re start her deductions when she returns...

Now...here is the biggie...what if she doesn't return? At what point due you turn her over to COBRA and not pay her health insurance...would that be from the initial date of her leave of absense? I hope I spelled that right!

Thanks

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Unfortunately, this is the reason that a complete SPD and employee handbook is necessary. The provisions for the case you describe should be addressed, so that all parties are well informed. I do know that's difficult, especially for small employers. Let's look at non-FMLA LOA. The argument is that you "agreed" with the employee to pay for his/her health coverage once salary substitutes have been depleted while on LOA with the goal being that the employee would return. If the employee returns for one day, they've upheld their side, then they could terminate and elect COBRA. If the employee does not return, as you said, the question is what the term date should be. The date the LOA started, the date you found out the employee will not be reurning, the date the LOA was supposed to end? With an agreement stipulating the return of the employee, you could possibly (this seems risky to me) require that the term date be the commencement of the LOA. Without this agreement, and without the procedure documented for employees to understand, I would think that most courts would argue that the term date should be the date you are notified that the employee will not return. Courts generally rule in favor of employees, not employers. They also tend to rule in favor of anything that allows coverage continuation. Having a retroactive term date that would require back-payment of large COBRA premiums and that could otherwise potentially create a 63-day break in coverage would not be lost on the court. If this leave were an FMLA LOA, the date an employee notifies his/her employer that he/she will not be returning to work becomes their term date. They are no longer under FMLA, and COBRA should be offered.

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I wanted to clarify something I said earlier concerning FSA's and LOA. I said, "If an employer pays FSA premiums on the employee's behalf while on LOA, and the employee never returns, then the FSA term date should be the day before the LOA." Employers have the right to waive the requirement that employee's pay their share while on LOA. If the employer pays their share, with no intention of asking for the money back from the employee, then I think the term date should be the date the employee tells the employer that he/she quits. Unless the employer has something that states they are paying the employee share and the employee need not repay the employer as long as the employee returns to work after the LOA. In reality, no premium payments are being made at all in a situation where the employee is planning to use the catch-up option, so the term date in that case would be the date the LOA started. I hope I'm making sense. I think I'm starting to go in circles

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Guest Carolynn

Ginny - regarding your question about pre tax and post tax, I was referring to a participant that was LOA with no paycheck - if she were to make contributions during her LOA they would have to be post - tax, since there is no payroll to run pre-tax thru.

I will let someone more experienced answer your other question, I am learning from this thread, also.

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Ginny, responding to something you raised several posts back. STD and LTD are benefits you would probably want to take deductions for on an after-tax basis. Taking pre-tax deductions for STD or LTD will make the benefits received under those plans taxable. Taking post-tax deductions for those benefits allows the benefits to be received tax free. Secondly, some employees might prefer post-tax deductions for other benefits (medical, dental, etc.) since it bows them out of Section 125 constraints and will allow them to more easily drop dependents off the plan mid-year after having large bills paid. I wouldn't even offer a post-tax option for most benefits to avoid this situation, but a wise employee might ask for post-tax deductions for the very reason I mentioned.

Also, to back up a minute (my mind is going too fast!). Ginny, you said you use the pay-as-you-go option. If that is the case, and your LOA employee is now in a period of time where no payments are being made, and you are planning to recoup the money upon her return, and you are wondering what the term date should be if she does not return, then the term date should be the date that the coverage was paid up to. Since you aren't under FMLA rules, you aren't technically required to provide continued health coverage while someone is on LOA. You can apply the more generous FMLA rules if you wish, but you aren't required to in this case. If the employee is on LOA as of today and calls you up right now and says that she quits, then the term date can be last date that coverage was paid for. That might be several weeks ago.

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Guest Ginny Rigsbee

Papogi...I am with you...I think...what do you do you seem extremely knowlegeable in this field. Now one thing I am still a little lost on...we have a LTD plan that our company pays for completely for every full time employee....are you saying that should an employee draw money on the LTD that money is taxable? I thought no matter who paid for the policy employee or employer that the money is taxable period.

Now our STD plan each employee pays for on their own...but we do deduct that money pre-tax. I beleive you were saying that if an employee pays for it on their own or in after tax dollars then the money they draw WOULD NOT be taxable? I sure missed the boat on this one if that is true.

Carolyn...you are doing fine with helping me...this is an awesome website!! Thanks...Gin

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Ginny - if an employer pays for disability coverage or if an employee pays for disability coverage on a pre-tex basis, the benefit is taxable. If the employee pays for the coverage on an after-tax basis, it is not taxable.

Now, if you actually gross up the employees' wages to pay for the coverage, then the benefit would be not taxable, but this is a little bit of a loophole.

If your employees pay for disability coverage, you may want to offer them the choice of whether or not they want to pay for it pre-tax or post-tax. Obviously it costs the employees a little bit more up front, but it saves them 30% to 40% of the benefit down the road when they really need it.

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mroberts is exactly right. Company-paid and pre-tax employee paid STD and LTD yield taxable benefits. Post-tax employee paid STD and LTD yield non-taxable benefits. You might want to start offering your STD on an after-tax basis at the start of your next Section 125 plan year.

Incidentally, I am a Flexible Benefits Supervisor at a large TPA, and we service enough clients that we see a wide variety of things. I'll be the first to tell you that the knowledge at this message board is very deep. It's an active board, so you get anwers quickly, and you get enough eyes looking on each situation that you're bound to get some usable information.

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  • 4 weeks later...
Guest Ginny Rigsbee

Papogi...Hi...hope all is well. My employee that had the serious injury is still out and will be for sometime...she is planning on coming back so I had a few questions. We told her she would need to pay for her own health insurance while on leave. Do I have to place her on COBRA (I didn't think I had to since she was returning) or can she just pay our business directly. We really didn't want to let the money accrue until she returned as is will be a substantial amount and she will be working very limited hours when she returns. Thanks for the advice...this can go to anyone that may have an answer.

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You should offer this employee COBRA. Reason being what if she tells you she'll be back in two weeks, which turns into two months, which turns into two years...... The situation would start to get ugly and you'll eventualy have a problem with the insurance carrier not wanting to grant this employee any further coverage. Offer her COBRA since she was exhausted her FMLA and when and if she comes back to work, put her back into the active group.

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Hi, Ginny, yes all is well. In fact, I recently learned that my wife is pregnant with our second child. Now on to the drab stuff: If an employee goes on FMLA, it is easy to say that once the 12 weeks go by, coverage will terminate. At that point, the employer can offer COBRA, and the employee can then decide whether or not they want to continue coverage. I remember that you are small enough that FMLA does not apply. If I am correct, your employee went on LOA with the understanding that she would pay for coverage until she returned. You exhausted all pay and pay substitutes from which to take pre-tax payroll deductions, so now the employee has been paying you with after-tax dollars. You don't have to put the employee on COBRA, but I agree with mroberts' warning. Without this policy in writing, you will be in a guessing game until she returns. If she returns as promised, no problem. If she does not return, the day you learn this you can terminate her and offer her COBRA, and then she can continue for another 18 months. In that case you may have wished you had tried to terminate her earlier. The potential problem is that if you put her on COBRA now, and start counting the 18 months, what if in the 17 month she decides not to return and she now has serious medical bills. She only has 1 more month on COBRA. She can then argue why you put her on COBRA way back when there was an "agreement" between you and her that she would pay her premiums while she was out, with no mention of COBRA.

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Guest Ginny Rigsbee

mroberts...thank you for your response....do I legally have to offer COBRA? or can we just assume she will return? I see what you are saying but at the same time I was trying to avoid the hastle of going on and then off of COBRA.. we do not have FMLA as we are a small company...the employee has no problem paying her own premiums as she understands that we cannot continue paying it for her since she is not working. Please advise, and thank you as always to anyone that answers!

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You could always do better than COBRA, but I wouldn't. I've heard every excuse in the book when it comes to employees being out on disability and when they will return. Your facing two possible problems here. First, say six months goes by and you are still treating this employee as active and you just now find out she's not coming back. You now have to offer her COBRA, however she hasn't been working the past 6 months. The carrier might not approve the COBRA offering at this point if they realize that you continued her coverage for 6 months without her being active.

The second problem you run into has to do with your claims experience. Participants on COBRA utilize benefits 50% more often than your active employees. Trust me when I say you don't want to extend an inactive employee's participation on your health plan as long as possible. This is only one employee and your claims experience isn't going to be 100% credible, nonetheless, who knows what kinds of claims are going to occur 13 months down the line if she elects COBRA.

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  • 2 weeks later...
Guest Ginny Rigsbee

Congrats Papogi!! Your life will really change now...thanks to you and mroberts as always for your help..now the big question...what would you advise me to do with this situation? would it be in our best interest to terminate this employee and offer the COBRA now? Then maybe when she is better she could return and just re-start her employment with us.

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This is a tough one. From the outside, it’s easy to see the objective reasons for putting this person on COBRA. They won’t be happy that their payments will go up by 2%, and they will be limited to the next 18 months (that may not be an issue if she plans to return before that time is up). In the interest of employee relations, especially since you are a small employer, you will have to look at this employee’s track record, as well. If she has always been a trusted employee, and she is telling you a specific date which is not too distant on which she plans to return, I would be inclined to go with that and forego COBRA. If the info you have is too loose, however, terming and offering COBRA may be best. Tell her the truth that you are doing this to make sure that your long-term relationship with your carrier is maintained. As time goes by, the carrier could get more and more unhappy with giving an employee on non-FMLA LOA benefits as if she were fulltime, albeit paid by the employee. Also, remember that other employees will watch whatever it is you do, and expect the same treatment if they are in a similar situation. A precedent will be set.

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