Retro deductions

[Guest Benmark]

I'm wondering how the best way to structure retro deductions for new hires and change in status. Right now, we offer a 31 day period for the initial enrollment in our cafeteria plan. If an employee enrolls on the last day of that grace period, we take a retro deduction (pre-tax) back to the effective date of coverage. Do others handle it that way. I've heard the IRS frowns on retro deductions for new hires, but I wonder how many plans don't take retros.

That is the same way we work it for change in status. Do most others take retros in this situation with after-tax dollars?

[Guest georgia]

we allow an employee to be made whole. a missed deduction is recouped when the deduction would have been made except for the employer's failure to collect the premium timely.

[Guest Benmark]

Thanks Georgia. Are you saying that you don't take a retro deduction at all? Or that you would take a retro deuction when you take the next regularly scheduled deduction? If so would that deduction be taken on a pre-tax basis?

Any others with thoughts? Thanks!!!

[Guest georgia]

we don't allow retro coverage or deductions except as defined under HIPAA for newborns. but we collect missed deductions on a pre-tax basis in the next payroll cycle.

[E as in ERISA]

I've seen the premiums collected retro, but as you say I don't know that the IRS would agree with that. I have heard that some insurers have arrangements where they don't charge for that initial period, so there is no retro premium to collect but they provide the coverage. (I think that it was in the context of large employer so somewhere it was probably built into the cost, but they didn't want the administration).

[Kirk Maldonado]

Benmark:

Please clarify if you are talking about (1) insurance premium payments, (2) contributions to flexible spending accounts, or (3) both.

[Guest Benmark]

I'm speaking about both. Actually, I just heard back from our ERISA counsel who advised that if we were to collect the retro deductions (on pre-tax insurance coverage), it would have to be done on an after tax basis. I believe there is an exception made--and pre-tax retro deductions could be taken--in the case of elections made at the end of the grace period for certain status changes for birth or adoption, but that's it.

With respect to FSAs, our attorneys advised us not to collect anything retro. They would prefer us to make the FSA reimbursement effective coincident with or after the first deduction is taken (i.e., a March 1 eligible that makes their initial FSA election on March 31 would not be able to submit reimbursement for otherwise eligible expenses that were incurred during March). Currently, we would amortize the deduction beginning April 1 but would allow the employee to claim reimbursemetn for claims in March.

Does that sound right?