can a waived participation be revoked after 1 year?

[Guest Humera]

I think I know the answer to this, but thought I would run it by this forum.

An employee signed a waiver of participation in the section 125 plan in Dec. of 2008, thus all her premiums were taxed. When she received her 2009 W2, she couldn't understand why she had to pay taxes. I showed her her signed waiver. She claims that the agent did not make it clear to her what she was signing. It's her word against the agent's, who says that he asked her repeatedly if she was sure about this.

She is insisting on having a retro adjustment done and a corrected W2 issued. I don't think that would be possible. She has signed a legally binding document, if we make the change wouldn't we be out of compliance? And our section 125 plan could be revoked.

I am pretty sure, we cannot go back and make this change, but if anyone here has an idea or way please do let me know!

[GBurns]

No, you cannot go back and adjust 2009, because section 125 requires that thhe salary reduction election be prospective. Itt is also much too late to claim error for 2009.

What stopped her from having been allowed to make her annual election at the Open Enrollment for the 2010 plan year ? There is usually a new election opportunity each OE. What does your Plan Document state or require ?

[oriecat]

She signed it, she's out of luck. Did you have open enrollment so she can elect it now? Have you considered requiring all premiums to be paid pretax so it won't be an issue in the future?

[Guest Humera]

All employees are automatically enrolled in pretax, but during the 2008 enrollment period she signed a waiver of non participation. So, she was taken off. Nothing stopped her from reenrolling in 2010. She just never bothered to do so. She believes the agent didn't present it clearly. .....always know what you are signing!

But maybe it is a good idea to make it a mandatory participation. I will run this by the responsible parties.

Thanks for the input!!!

No, you cannot go back and adjust 2009, because section 125 requires that thhe salary reduction election be prospective. Itt is also much too late to claim error for 2009.

What stopped her from having been allowed to make her annual election at the Open Enrollment for the 2010 plan year ? There is usually a new election opportunity each OE. What does your Plan Document state or require ?

[LRDG]

I am not a fan of default elections that automatically enroll EEs each subsequent plan year, without annual open enrollments. ERs' and plan administrators want the tax advantages of Sec. 125 without annual open enrollment, but either doing nothing or the default election will inevitabely lead to just the scenerio posted here. Default elections eventually lead to a hard luck story, true or fabricated, from an EE that puts the plan sponsor/administrator in the very position this ER/administrator is protected from by virtue of EEs signed waiver.

I'd suggest explaining to this participant you can't reverse her signed statement without putting not only her election in jeopardy, but the entire plan, with taxes of all participants and matching ER taxes due plus sanctions and penalties. It's an IRS plan and the penalties are as much as $25k? per participant per day, if the plan is found out of compliance and subject to penalties, accumulate each day until IRS determines the plan has returned to compliance status.

Again, this plan has the protection of the signed waiver and if you allow this participant to reverse the waiver, you should adopt a default annual enrollment for the POP plan, save yourself the burden of open enrollment and wait for EEs who would have been entitled to change an election but didn't because there was no open enrollment. Consider how the plan will manage employee's who mid year want to drop dependent coverage because they decided a spouse would carry coverage for the child or a family can no longer afford premiums because of temporary financial hardship, without qualifying status change. The plan will be in a position of making these decision, subject to IRS scruitny. If every employee allowed to make a change in election is not treated the same, and any of the elections are not in compliance, the plan will be in a position to plead for mercy from IRS officials.

I have reviewed IRS letters (one client for not filing 5500 for 5yrs, $98k IRS penalty), and plead ignorence on my clients behalf 10yrs ago. I'm not sure IRS is in as a forgiving mood considering 125s have been around for 20+yrs.

Stepping off my soap box now.