Sabbatical leave with partial pay

[Guest Humera]

I am with a school district that offers a section 125 plan for health premiums.

A teacher was participating in this plan, when she went on a sabbatical leave for 1 semester, with a partial paycheck. She was required to make full premium payments (no employer contribution) for the time she was out. These deductions came out of her partial check. The premium was changed to post tax (I don't know why). After her return they remained post tax. She just now in 2010 figured out that they should have been pretax.

My questions:

Should there have been documentation of her 'un'enrollment, change to post tax?

Once back, should we have put her back into pretax automatically or should there have been a new enrollment?

She now wants it changed in April, our plan year is Jan-Dec. Can I change it to pretax now, do I need a new enrollment form?

She is also asking for her W2 to be changed and to show the premiums as pretax for the 2009 tax year. Can I retro it?

Where can I find IRS documentations on this in detail?

Thanks in advance for any help!!!!

[LRDG]

If I were responsible for correcting this problem I would choose the easiest and most compliant approach. Assuming the plan document does not specify how "Sabbatical leave w/partial pay' is treated for purposes of your Sec. 125 plan, and also due to the fact that for the one semester period of the sabbatical the participant did not make an election change or sign authorization to change her prior made election, I would treat all deductions as pre tax, and issue an ammended W-2 for the 2009 plan year. Calculate the tax savings owed to the participant for the 2009 plan year, in addition to any necessary corrections/ammendments to LOA provisions in your plan document, and the plan's 5500 Form if one is required by your plan.

Assuming your sabbatical leave policy qualifies as a status change under Sec. 125, (I believe most sabbatical leave does, however I have not reviewed your sabbatical policy to determine that it meets IRS status change regs) and assuming your plan provisions/plan document recognizes sabbatical leave, the participant's election change should be documented with a signed election change form for the period of the leave, particularly if a change is made to the participant's prior made election/deduction for the 2009 plan year. Arbitrary changes by payroll or the plan administrator are not allowed unless they meet IRS regs. Election changes should only be made with the participant's authorization via a signed election change form, assuring the election change is compliant with both the plan and the IRS election/status change regs.

With respect to this participant's 2010 premium deductions, I assume premium elections for the Sec. 125 plan are default elections, and not via annual open enrollment each plan year.

My guess is that when the participant was hired and eligible to participate, a one time election form was signed authorizing premium deductions on a pre tax basis, and this election by default automatically rolles over from one plan year to the next. By 'default' this election remains in effect untill the participant resigns or otherwise specifies a qualified change in status and election change via a signed election change form.

But for the sabbatical leave and the payroll change from pre tax to post tax deduction by the payroll department, the participant's 'default' pre tax election for premium payments would have continued on a pre tax basis for the 2010 plan year. If this is the case, and if you choose to correct your plan's compliance problem as outlined, I would treat the default election as the legitimate election.

Calculate and reimburse participant's tax savings for the period thus far for the 2010 plan. You may want to verify that any payroll system/tax withholding corrections made will result in corrections to the 2010 plan year W-2 form as well.

Create a clear well documented audit trail of the actions taken to correct the problem in the event of an IRS audit. Consult with an authority authorized by your organization to verify that you fully understand the problem and have made the necessary corrections to bring both 2009 and 2010 plans into compliance. You may want to consider addressing sabbatical leave and any other LOA issues in the plan document, for future reference.

Good luck finding IRS guidence or documentation concerning correcting this or any other problem, as it does not exist. However, to do nothing does violate the provisions of the Sec. 125 plan and the legal requirements of IRS Sec. 125.

[Guest Humera]

Thank you for your detailed reply!

I did go ahead and make the amendments to her 2009 W2, refunding any overpayments in taxes, etc. It means I now have to also file corrections for all 4 quarters' 941's. And as you mentioned, I am keeping a trail of all documentation. Since the employee never made a change or sign a new election form, I am going by the original election, which was to pretax all premiums. We are treating this as an erroneous switch to post tax deduction, which this really seems to be.

[LRDG]

If you don't mind, I'm curious how the plan handles sabbatical leave with partial pay vs. full pay or no pay?

Hope the PD doesn't have to be amended, but if so, better now than later.