What now -- FSA administrator failed to withhold wages?

[Guest STP20004]

Does anyone have any thoughts on how to handle a situation where an FSA administrator failed to withhold any wages in accordance with the FSA plan participant's salary deferral election? Note, the plan year ended 12/31/05 (with the exception of the 2 1/2 month grace period and administrative run-out period). The employer has indicated that it is okay with reimbursing the ee for his qualified medical expenses as a 106 expense. My thought is that this fix would be okay (however, the participant would, in theory, be a "zero" for nondiscrimination testing). Any thoughts? Is there any guidance on this issue? I can't seem to find any.

[oriecat]

So the participant went an entire plan year with no deductions and didn't bother to tell anyone until after the year was over? Why should they be reimbursed when they could easily gotten the situation fixed after the first incorrect paycheck?

[GBurns]

It must be something in the water.

There is a thread on the 401(k) Forum that has almost the exact same situation.

[Guest STP20004]

My thought is that regardless of the employee's failure to acknowledge the non-withholding of wages, under the Health FSA rules of Code section 125 and the regulations, the uniform coverage requirement runs off of an employee's election, not the actual withholding of wages, such that the employer would be on the hook... but for what exactly... not sure here...

[GBurns]

Now that I think about it, I remember 2 local employers, 1 private 1 public, who 1 year both took until about July or August to fix the errors in withholding that were reported after the first bi-weekly payroll in January. They both were under union pressure to correct and it involved over 5% of the employees in each case.

So it is not too much of a stretch for me to think that these employees could have dutifully reported the error in February right after the January payroll, but the employer just never got around to fixing the problem.

[jmor99]

I've had this same thing happen with employers. This is an administrative error. The employer has the right to collect the missing contributions, and issue a corrected w-2. But HOW do you get pre-tax dollars for last year out of this years check? Most employers just eat the loss. Frankly, any claims paid to an individual in that situation ought to have that $ amt added to their taxable income.