Employer did not withhold enough for cafeteria plan. Can they deduct t

[Guest Tara Curran]

For the past several years, the employer has not withheld enough from participant's salary for the cafeteria plan. A new controller has taken over and discovered this error. Can the employer now withhold the additional amount needed to cover the cafeteria plan deductions?

[Lisa Hand]

Are these deductions for insurance premiums?

[This message has been edited by Lisa Hand (edited 05-24-2000).]

[Guest Tara Curran]

No, the withholdings are not for premiums.

[Lisa Hand]

Do you have a TPA (in which case you should discuss this with them) or are you self-administered?

How could this occured for several years, if it is for an FSA?

[Guest Tara Curran]

The cafeteria plan is self-administered. The new controller informed me that the person who previously handled the payroll deductions and various other roles was not the most conscientious person who paid attention to detail. I guess no one ever double checked his worked and questioned the withholding.

[Guest Linda Moiseyev]

New elections have to be made each year. The only way for this to happen several years in a row is to continue the same deductions year after year. Are these participants submitting new elections each year?

[Guest Tara Curran]

Unfortunately, the employees have not signed election forms every year. The latest forms the new controller can find are dated in 1994. She is in the process of having everyone sign new forms now.

[Lisa Hand]

What does your plan document say about how elections should be handled?

Based on the posting so far, I would say a complete audit of your 125 Plan (as well as anything else the previous person touched) is in order. You are probably looking at a much greater range of issues than this one person's election discrepancy. You might want to consider working with a TPA which by the nature of that relationship provides the double-check for the plan on a number of different levels.

[pjkoehler]

Can you give us some more facts? Is this a case where the employer reimbursed qualified expenses only up to the aggregate FSA salary redirections actually withheld from paychecks and denied claims for qualified expenses that would have been reimbursable had it collected the salary redirections actually authorized? OR Is this a case where the employer reimbursed qualified expenses up to the total amount of FSA salary redirections authorized by each participant, but is out of pocket because it failed to actually withhold that amount from the employee paychecks.

[Guest Tara Curran]

The employer reimbursed amounts up to the authorized salary reductions, not just the amounts actually withheld. In other words, the employer is out of pocket those additional costs.

[pjkoehler]

Assuming the applicable statute of limitations has not run, the employer could demand that each affected employee repay the amount of the underpayment and then pursue a breach of contract remedy on the theory that, while it failed to collect the total amount authorized, the participant should not be unjustly enriched. You'd want to review the terms of the enrollment form or salary reduction agreement which forms the basis on which the employer asserts an underpayment of salary redirections to see what defenses the employee would have. As a matter of contract construction, it may well be that these agreements automatically terminated at the end of the year, or have other provisions that would frustrate any attempt by the employer to obtain repayment. In most jurisdictions, most verdicts don't go the employer's way, it's almost certainly not worth the candle. It could also be that in the absence of affirmative elections each year, no enforceable agreement was even in effect and the employees could all argue that the employer improperly collected any salary redirections. So there may even be a potential to backfire and expose the employer to liability under state wage statutes. State law varies greatly on the right of the employer to offset wages for an unsettled debt owed by an employee, so if you want to play hardball you might research that issue. However, modernly there is little if any cheese down that rat hole for an employer in this context and, besides, it wouldn't exactly do wonders for employee relations. In all likelihood, the employer will simply have to absorb the loss and offset it in theoretical terms against the savings it received from not recruiting and/or training the right person responsible for this in the first place.

[This message has been edited by PJK (edited 05-26-2000).]