Debit Card Improper Payment

[Guest abw]

Revenue Ruling 2003-43 states that one way to recover an improper charge on a debit card is to offset the improper payment against a proper charge "during the same coverage period." What if the improper payment was in late 2005, and it is not discovered until 2006. (Assume no grace period.) Can the plan offset the improper payment against a properly substantiated charge in 2006? If this is done, the overall effect in the two year period seems right, but the result is that (1) the employee was able to exclude from income an improper expense in 2005, and (2) the employee was able to use money that was pre-tax in 2006 to repay an indebtedness to the plan which arose in 2005.

[Guest ehs]

I would stick to the plan year in which the expense occurred, and not mix expenses from different plan years. We have had similar situations and have first resorted to payment from the participant via a separate check or an after-tax payroll deduction (if permission by the participant is granted in writing). If that fails, then we request that the employer plan sponsor either issue a 1099 or add it back via w-2, even if the W-2 is issued for just the amount that was not substantiated.

[LRDG]

If there are no eligible 2005 charges from which to off set, the transaction should be reversed and the balance forfeited.