Retroactive Pre-Tax Election after HR Dept Error

[Guest Vonnie RB]

An employee elects a dental plan in writing at open enrollment. Due to error by HR department, the deduction was never taken. Ten months into the year, the employee realizes error when claims are denied (never looked for deduction on pay check). Employee wants to pay back premiums for the year and enroll in the plan. Allowable?

Also, another employee enrolls newborn on day 35 (5 days after deadline). What does everyone do in practice? Deny coverage? Does it matter if employee already has family coverage and premium doesn't change?

[Guest kclark]

I actually did quite a bit of research on this issue and obtained the opinion of internal legal staff as well as an ex-IRS Agent. I am assuming you have a Section 125 plan? If so, here is what the ex-IRS Agent had to say:

* It is impermissable to make a retroactive election, let alone use future salary to make back payments on a pre-tax basis.

* The only times an election and payments can be made retroactive are: for a birth, adoption or placement for adoption, and an arrears situation in a FMLA.

She also said there were 3 ways to go:

* Most conservative position is to not have any retroactive elections or payments.

* Less conservative position is to take the retroactive portion of the election with after-tax dollars.

* Agressive approach is to take the whole retroactive election on a pre-tax basis. With this option, you take the chance of being audited and having penalties imposed as well as deductions taken by employer for tax purposes becoming taxable income.

But, do employers follows these rules......most likely due to the fact the IRS has just begun to audit Cafeteria plans more often, more will start!

With newborn question, my past experience has been that:

1. Depends on if the Carrier will allow it. I've had some carriers be really strict on this and others that are more flexible.

2. When family coverage is in place and it has only been a short time since deadline passed, the company philosophy was that the dependent having medical coverage was the most important thing. With this option the issue of being inconsistent and following discriminatory practices could become an issue.....where do you make the cut-off?

Hope that helps.