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Correcting taxability of deductions


Guest mli

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Help!

We have just discovered that one of our deductions, a spousal surcharge for employees who choose to cover a spouse who is employed and eligible for coverage elsewhere, was set up incorrectly in the payroll system. It was set up as a post-tax deduction, while our plan docs indicate that this should be a pretax deduction. The issue spans several plan years and affects 40-50 employees.

Obviously, this needs to be corrected because the affected employees are due the taxes that they incorrectly paid on these deductions. My question is, is there any way I can do the entire correction "upon discovery" in 2010, or am I really looking at going back and amending 941s, 940s, W2s, etc. for several years for each of these employees? I fear I know the answer, but given that the impact to each employee is maybe $200 in taxes, the idea of paying thousands to amend all of those tax forms is something we'd like to avoid if there is any provision that would permit us to do so.

Thanks in advance for any advice!

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Unless it is eligible pre-tax else-where, a sur-charge is not an eligible expense under Sec. 125.

OK, tackling that issue elsewhere, but let's pretend for a minute that it was a qualified pretax premium deduction that we had been taking on a post-tax basis. Let's also pretend (even though it makes us very, very sad to do so) that said deduction has been set up this way since 2003. What are our safest options for remedying this to make the affected employees whole?

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A spousal surcharge is an extra insurance premium, so why is iit not eligible ?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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The surcharge looks like a penalty paid by employees with employed spouses with other available coverage.

It is not charged for all spouses of employees.

Most important is it is not called a premium, it's called a surcharge. Surcharges are not eligible under Sec. 125.

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The surcharge looks like a penalty paid by employees with employed spouses with other available coverage.

It is not charged for all spouses of employees.

Most important is it is not called a premium, it's called a surcharge. Surcharges are not eligible under Sec. 125.

What about a "surcharge" for employees who don't submit to a Health Risk Assessment requirement by the employer?

They're still electing the same medical coverage, but are paying a higher premium. If they complete the requirement during the plan year, their premium is reduced.

Are you saying that we can't do this thru Sec 125 at all ? Or that we have to have 2 sets of employee contribution tables ?

Thanks for your comments on this topic. Cites would be appreciated.

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MARYMM, higher premiums charged for insurds with high risk life styles is not a new practice in insurance underwriting. Refusing a health assesement prevents the insurance company from making a determination about smoking vs non-smoking, and the adverse effects to the insurance company and insured non-smokers who cover the higher health care cost smokers typically represent. It's a premium and it's eligible. The health asessement may not be exclusive to smoking vs non, it may also involve pre-ex.

A surcharge on the otherhand can be an administrative fee, a billing fee, it can be any number of things, even a penalty fee. IRS isn't particuarly interested in making a determination whether a surcharge is really a premium, an admin. fee or a penalty.

If the penalty is part of underwriting to cover higher risk that has potential to involve covering cost of higher health care claims, it's eligible.

If the penalty is called a premium, that is.

edited to add:

MARYMM, I read your post again and not sure if the higher premium you refer to is charged by the employer, TPA or insurer? Depending on who is assessing the premium, it could make a fairly significient difference.

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A surcharge, in this context and as described by both mli and MARYMM, is simply a higher employee premium share.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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It may be a premium, but then it can't be called a surcharge and qualify.

So you are saying, if the normal health employee contribution to cover a spouse on a plan is $200/month and if a spouse is eligible for other coverage, the employee has to pay $250/month, the employee has to pay the $50 "surcharge" to cover the spouse after-tax?

If so, I have never heard anyone take this position. Do you have any guidance that supports this view?

What if it is phrased the opposite way (Normal employee contribution for spouse is $250/month but if spouse doesn't have other coverage it's only $200)? Is the answer different?

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The tax code does not describe a surcharge as an eligible expense under Sec. 125.

If a $250 group medical premium is discounted, there's no surcharge.

It's still not clear if the surcharge is imposed by the insurer, the ER, TPA or admin., if it pays medical claims or is a penalty that goes into a fund that pays????

Is the surcharge used to off-set employee only premiums? Help me here. I'm grasping at straws to understand what would make the surcharge eligible, and make those collecting the surcharge believe it's eligible.

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In virtually all the cases I've dealt with, the spousal surcharge is imposed by the employer. I've seen it used in both the fully insured and self-insured contexts. I have never, ever, heard of any employer taking the surcharge out after-tax. The employees' who pay the surcharge just have a higher premium to pay.

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In virtually all the cases I've dealt with, the spousal surcharge is imposed by the employer. I've seen it used in both the fully insured and self-insured contexts. I have never, ever, heard of any employer taking the surcharge out after-tax. The employees' who pay the surcharge just have a higher premium to pay.

In our case, the employer is imposing the higher contribution amount on the employee. ER pays about 80% , EE pays about 20%. of medical insurance premiums. If the Health Risk assessment is not done, the ee pays more - a flat $20 per pay check. For ease of implementation, we called it a surcharge and assess it separately in payroll. Once the ee completes the assessment, we remove that deduction.

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In case it's helpful, here is the exact verbiage from the plan documents:

"Notwithstanding anything in this Program to the contrary, if a Participant’s spouse or same-sex domestic partner is enrolled in an MSLI group medical or dental plan and waives coverage under a group health plan that is sponsored by such spouse’s or same-sex domestic partner’s employer, or if the Participant fails to inform the Plan Administrator whether the Participant’s spouse or same-sex domestic partner is eligible for coverage under a group health plan sponsored by their own employer and, if so, is covered under such plan, the Employer shall impose a charge of seventy-five dollars ($75) per pay period on the Participant. The charge shall be imposed until the Plan Administrator is informed during a subsequent open enrollment or following a change in status event that the spouse or same-sex domestic partner has either ceased to be eligible for any group health plan of the other employer or has enrolled in all group health plans of the other employer for which he or she is eligible.

The $75 charge imposed per pay period pursuant to Section 4.1(a)(vii) shall be deducted from Participant’s pay on a pre-tax basis for those Participants with spouses and on an after-tax basis for those Participants with same-sex domestic partners."

We refer to the amount in question as a "charge."

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mli, if the EE surcharge for coverage of spouse w/other available coverage is used to pay premiums or claims, complies with regs applicable to either fund account, is controled by the plan, it can be interperted as additional premium used for purposes of paying plan expenses.

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