Incorrect Premium Withheld

[Guest dparks]

An employee elected to have their health insurance premiums for Employee+One deducted pre-tax under the Cafeteria Plan. In 2005, the employee changed from Employee + One to Employee Only. The employer changed the type of coverage with the insurance provider, but failed to make the change in payroll and has continued deducting Employee + One. The Employer has just realized this in 2007. Total amount over withheld is about $4,500. What options or obligations does the employer have? What is the proper method to correct?

[LRDG]

The obligation is to refund the EE $4500, less payroll tax not paid on the amount. Issue corrected W-2 to EE, and possibly correct 5500 forms for prior years, in addition to correcting other payroll based tax, such as ER matching FICA. There may be other income based plans the ER should review and correct.

This is an example of potential problems when EE elections are not conducted annually.