Compensation & withholding

[R. Butler]

We are tpa for Co. A 401(k) plan.

A health insurance company incorrectly told Co. A's employees that the insurance co. that they could reduce 2013 deductibles by medical expenses paid in 2012. In an attempt to make things right the health insurance company is going to pay the employees the amount of their unused deductible in 2012. They cannot pay the employees directly. Thye pay the employer who in turns pays the employees. The employer has determined that this will be run through payroll (similar to a bonus) and included on the W-2. (That doesn't seem correct to me, but it is not really somehting that we can advise them about.)

Given that the employer is treating this as W-2 wages should the employees be allowed to defer to the 401(k) plan? Just given the way the employer has decided to treat this it seems to me like this will be treated the same a s a bonus payroll.

Thanks in advance for any guidance.

[masteff]

What does the employer want? Personally, I'd run it thru payroll as a negative health insurance deduction. It's no different than any other medical insurance rebate or refund.

[R. Butler]

Employer wants to essentially treat it as a bonus. Their plan allows participants to defer up to 100% of any bonus and he wants to give the participants that flexibility.

[QDROphile]

Without regard for the propriety of the corrections relating to health insurance premiums, an employer can pay whatever extra bonus compensation the employer wishes to pay (except to union employees). As long as the employer is counting it as W-2 income, bonus it is for plan purposes. Just be claer the the employer is not engaging you for advice about the back story.