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Missed payroll deductions and "make ups"


RatherBeGolfing

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401(k) client has an issue with its welfare benefits and is asking me to point them in the right direction.  I don't do welfare benefits at all so I figured id see with you guys if this sounds like "standard practice".  I have a feeling there is fault on more than one party here, but it sounds like everyone involved are just pointing fingers at others.

Company offers several different welfare options in addition to health insurance, such as FSA, dental, short term disability , etc.

Starting in mid 2018 (at least) through March 2019, some payroll deductions were never made.  For example, one participant did not have their dental and FSA deducted from their paycheck starting in October 2018.  It was discovered in March of 2019.  Dental benefits were paid for and participant was credited with the elected FSA amount, so I assume that those were paid with company assets since payments exceed deductions.    

The proposed solution is to just double up deductions each payroll starting in April 2019 until the participants have "paid" for the benefits they were credited with.  Is this a common solution when you are talking about 5-6 months of deductions spread over more than one plan year?  It sounds "fair" that the participants should pay for the benefits they received, but the participants also have a higher taxable income in 2018 than they should had everything been done right. 

Any input would be appreciated.

Thanks.

 

 

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Yes that is what I have seen used unless the employee is willing to have it all taken at once (very very rare unless an HCE), since it is such a large period of time and amount of $s. But like you stated that by crossing tax years, the employee had unfavorable tax treatment on some 2018 wages and will have more favorable tax treatment in 2019.    What one would be able to argue to the IRS should you have an audit is debatable and dependent on the scope and details....  You are looking at "reasonable good faith efforts" on corrections with little guidance beyond that with no standardized corrections like you do have for retirement plans.  

Their other issue is how are they going to handle any balance owed from someone who terminates (especially with little to no notice) during that repayment period?

{Off-topic :Personally I would be doing a full audit of payroll and benefits for all employees if this large of a mistake had not been found in that timeline.  Best business practice is to audit/reconcile benefit bills to the benefit election system and then to payroll deductions on a consistent basis. We do the first step monthly (billing to election system) and then the deductions in depth at least once or twice a year (especially after OE/plan year changes) and then by totals monthly (our standard of error is less than $100 or we deep dive audit by employee by bill/plan/deduction).  We have a weird situation where some benefits are aggregated against an employer credit and that amount can't be negative, so we have to check it even more often and more in depth than 1-to-1 elections vs deductions. }

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Thank you.  They are digging deeper and have found other discrepancies.  Some employees who had less deducted last year actually have excess deductions this year (exceeding current and "makeup" deductions).  I'm advising them to audit their books until they are comfortable with a timeline for when issues actually started.  It will be interesting to see where it goes...

 

 

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This is not something I would address without competent legal advice.  I recommend that you and/or your client consult with an attorney experienced in welfare benefit and payroll issues.  Although I do not have all the facts, I am skeptical whether the proposed "fix" will work.

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I agree with Chaz on both counts.  An attorney experienced in welfare benefits and related tax issues is what you need.  I've had clients with this issue and the analysis is much more nuanced, and the resolution more complicated, than one might expect.

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Thanks all.  At this point they are still doing an audit to see what looks off, but they asked me if the proposed "fix" was normal.  I did suggest an attorney as well, but I have a feeling it will depend on the amounts and how far back this issue goes.  Its a major benefits company so I was a bit surprised that they wanted to fix it by simply doing double deductions in 2019.

 

 

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