Guest aearle Posted October 22, 2002 Posted October 22, 2002 One of my clients has a Sec 125 with FSAs on a 1/1-12/31 plan year. In July they changed payroll providers. Because of this switch (and an oversight on the part of the employer), the payroll deductions for the FSAs were stopped. Now that they have adjusted to the new payroll provider, they want to get the FSAs started again. I have not run into this before, but it seems that this must violate some regulation(s). Is it O.K. for the employer to just start them up again and finish out the plan year? Can employees claim reimbursements for services that took place during the hiatus? Should the employer allow make-up deductions for the months (about 3) that were not deducted by doubling up on the rest of the year's deductions? Or, due to this "hiatus", can the employer allow participants to adjust their elections downward to take into account the lost months? Or, should the employer consider the plan year terminated and start a new short plan year with all new elections? Sorry for so many questions, but this one seems sticky. Help! And Thanks!
papogi Posted October 22, 2002 Posted October 22, 2002 There is really no reason that the original elections should not be honored, and they should not be given any opportunity to change their elections. The coverage should continue through the hiatus. Payroll should take increased deductions so that the total elections are maintained. There is nothing in the regs that says that deductions must be made weekly/bi-weekly, etc. They can be taken really over any number of pays. This should not really be a problem. Only DCFSA's could pose a problem. Since you only have access to what has been put into the account, there will be a bunch of DC claims during that span that will be waiting for these big payroll deductions.
Guest aearle Posted October 22, 2002 Posted October 22, 2002 Excellent! Good to know it is not as big a deal as I thought. What if the employer does not want to increase deductions to make up the difference? Or if some of the employees don't want that done? Obviously that would, in effect, change their elections. I want to be able to let the employer know why that is not advisable and what the ramifications could be. Thanks!!
papogi Posted October 22, 2002 Posted October 22, 2002 Since 125 requires that elections be for 12 months (except in stated short plan years), and that elections cannot be changed outside of situations addressed in 125-4, then I think the employees and employer are bound to honoring their original agreement. The employer needs to take all the necessary deductions. I just don't see any way around it. If an employee's pay is too low to allow the full FSA deductions (state wage law minimums held to, as well), then the employee should submit the extra amount with a post-tax check. What little guidance is given by the IRS concerning mistakes surrounds situations where incorrect reimbursements are made, or where an employee elects a DC account and doesn't even have kids. While payroll has made an error, every participant has also gotten paystubs showing no FSA deductions. I think that the original elections need to be adhered to, but I have no concise IRS cite which addresses the rules of 125 in light of an error such as yours. That is just my interpretation of the regs, and a smattering of IRS guidance.
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