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Administrative error


Guest JBauer

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Employee elects to participate in 125 plan but, because of a payroll processing error, no amounts were contributed on behalf of the employee. Expenses have been incurred but not reimbursed. Although there is no correction program, is there a way the 125 plan can pay the benefits without becoming disqualified and without the employee having to defer his entire paycheck (even assuming the employer pays a bonus that's contributed to the plan)?

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My take on these mistakes (which are not uncommon), is that the employee is entitled to a spending account balance equal to the amount which should have been taken out of his or her pay, at the time(s) it should have been taken out of pay. The employer needs to allocate the money to the employee's account, and cannot make the employee supplying the funds a condition of doing so. That's step 1. Step 2 is how the employee makes the employer whole. This can be done pre-tax through deductions from future paychecks. or post-tax by having the employee write a check to the employer, or by having the employer waive the employee's repayment obligation. However, how step 2 is handled has no bearing on step 1.

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I saw an audit, VERY recently of the same situation being corrected as in the previous reply; there was not further action regarding the correction.

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