Pre tax health premiums and compensation

[Guest tmills]

We are having quite a fuss about this and would appreciate some input. As you know it is fairly common for employers to have employees pay their health insurance premiums on a pre-tax basis. Such a program comes under Section 125. However, in contrast to 125 items like dependent care, etc., amounts "deferred" to pay health premiums do not show up anywhere on a W-2 as they are exempt from FICA withholding. Therefore, if a plan uses W-2 compensation and adds back deferrals including 125, what happens to these health premium dollars?

Example

true gross pay $1000

-health prem. $100

FICA wages $900

401(k) deferral election 5%

Option 1 is they are added back just like other 125 items so that the employee above defers $50 (5%x$1000).

Option 2 is they are ignored and the employee above defers $45 (5%x$900) b/c those are his W-2 wages pre 401(k).

Of course if 1 is correct and the client has been using 2, there is the issue of participants being shorted in their 401(k) deferrals. In addition, if the client wants to calculate under option 2, and makes the appropriate document changes it would seem like a comp test would be needed which might be hard to pass because premiums are a larger % of a lower paid person's compensation.

Document is Corbel, and comp. is defined as W-2 + salary deferrals including 125, excluding expense allowances, fringe benefits, welfare benefits, etc.

Any assisstance (with code sites if possible) is appreciated.