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Working Around Retroactive Pre-Tax Deductions


Guest Tricia Kennedy
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Guest Tricia Kennedy

Our company is trying to address the

regulations not allowing retroactive pre-tax

deductions for benefits. Because our employee's elections are often made past their normal eligibility date (1st of month after date of hire; date of event with family status changes) we often run into situations

where retroactive deductions would be necessary. I understand some companies have allowed after-tax deductions in these cases.

Because of the administrative burdens involved, we do not want to go this route. It is been proposed internally that we look at setting effective dates for benefits coverage for employees to tie to "when paperwork is received" if it is past the eligibility date, to avoid any retroactive deductions. However, in speaking with medical plan reps., they do not appear to be able to accomodate dates that are not tied to a particular "event date" such as "date of hire". How are others handling this retro-deduction issue?

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I'm not quite sure which regulations you are referring to that do not allow retroactive pre-tax deductions. The only issue I know of in this situation would be at year-end where you may be taking a deduction in a year following the effective date.

The only other deduction issue I am aware of is taking the deduction PRIOR to the salary being earned, but not retroactively.

At 2 different companies I have worked for, including the present, we have taken and continue to take retroactive pre-tax deductions due to timing issues of receiving enrollment forms and system constraints on processing dates

An additional thing they do currently here (which I don't agree with) is on unpaid LOAs they allow employees' benefit deductions to go into an arrears situation.

When the employee returns they increase their pre-tax deductions based on the arrears balance over a period of time.

It would seem a lot more administratively cumbersome to me to have a "floating" effective date tied to enrollment form receipt. I know effective dates on status changes relate to receipt of enrollment forms as 1st of the month following receipt of enrollment.

As well, I know of no carriers who would administer effective dates that would not at least tie to hire date.

I have not heard of taking the deductions on and after-tax basis and am not quite sure why this would be done.

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Guest Tricia Kennedy

In response to Lisa's question - our current plan document states that employees have 14 days from date of hire to complete benefits enrollment; and 30 days from event date for status changes.

In reply to "kclarks" message, my understanding is that there are Section 125 regulations (relatively new) that do not allow retroactive elections on a pre-tax basis. See question 22 in the Section 125 Q&A (posted in 9/97). This was recently brought to my attention from a benefits lawyer we have on staff; I'm assuming that there are many companies out there not aware of the regulation.

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Tricia: Thanks for the heads up on the Section 125 Regs.....I will definitely look into that. This would greatly affect several things we are currently doing!

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Here's a suggestion that might solve your problem with retroactive pre-tax deductions, which by the way are not allowed. As I understand the question, the whole issue centers on the employee contribution for medical and dental coverage. In the real world we all know that many employees are are slow in getting their enrolment materials back to the HR department. Change your 125 plan to make the POP portion a negative enrollment. You give the necessary disclosure to the employee at date of hire which states that their participation will be effective he first of the month following date of hire. Now you have avoided the problem of retroactive pre-tax withholding since the employee has been a participant since the original effective date. the FSA portion of the 125 plan can still be operated on a positive enrollment basis.

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I have researched the proposed regs. 1.125-2 on Section 125 and I cannot see where it is actually specified that retroactive pre-tax deductions are not allowed. It definitely says that retroactive "elections" are not allowed, but doesn't specifically address the deductions.

We have determined the effective date of a status change to be the 1st of the month following event date, with the exception of births. We have also stated that if a payroll deduction is missed, we will retroactively take the missed deduction.

Also, in an unpaid LOA as I mentioned earlier, some the hospitals I am responsible for utilize an arrears situation and do not require this employees to make payments. These back deductions are added to their current pre-tax deductions.

Can someone tell me exactly where in the Section 125 Regs. it specifies this is not allowed?

I also looked back in Section 125 Q&A, Q22(9/97) in which it referred to "remaining portion of coverage" as being a critical factor for the IRS in retroactive changes.

Maybe someone could explain how this relates to retroactive pre-tax deductions, or if this is what it is referring to????

HELP!

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Guest Tricia Kennedy

A clarification to my earlier postings:

By "retroactive deductions", I am actually referring to retroactive election changes under a cafeteria plan and the corresponding pre-tax payroll deductions for the retroactive period. For example, under the cafeteria plan regulations, coverage as a result of marriage should be effective no later than the first payroll period after the request for an election change is received. However, the HIPAA regulations (Temp. Treas. Reg. Section 54.9801-6T(B)) specifically provide that health coverage with respect to a birth, adoption, or placement for adoption is effective retroactively to the date of birth, adoption or placement for adoption.

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That's where my confusion comes in as well......I think we're ok as far as the unpaid LOA with the "look-back" option under FMLA regs.

The only thing I found in any of my reference materials that even addressed retroactive pre-tax deductions issue was actually addressing HIPAA and the requirement for adding newborn children/adopted children. It states that coverage is required to be retroactive to birth, adoption or placement and then states "if dependent is enrolled within 30-days after birth, adoption, etc., a question arises as to whether or not the cafeteria plan can charge a premium retroactive to dob, adoption, etc." It then stated that the new cafeteria plan regs. expected to be issued in late 1997 should address this issue.......I haven't found it!

My source on this info was the Employee Benefits Answer Book, 5th Edition.

Guess I'm still confused as to whether or not retro deductions are or are not allowed as pre-tax in a life status change event.

I'm also curious as to what everyone else is doing as far as collecting back contributions in these situations.

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