Pre-tax arrearages collected following year

[lappinlandis]

Our company allows medical (actually, all) deductions to go into arrearage when an employee is on an un-paid LOA.
I always recover the deductions in the same year, but now am being asked if we can spread these out over a longer period, which would move us into the new calendar year.
Somewhere in my brain is the belief that pre-tax deductions recovered in the next calendar year become taxable, but an hour of google-ing turned up no information.

Can someone please verify (or refute) this for me?

Thank you!

[Luke Bailey]

Below is Treas. reg. 1.125-3, Q&A-3(a)(3)(iii). I think the IRS's failure to mention that the rule is pre-tax only if both the leave and return/repayment are in the same calendar year implies that they don't have to be. The same reg clearly indicates that the pre-pay method (i.e., employee has amount withdrawn up-front, before goes on leave) is after-tax to the extent of the leave taken in next year, because that would result in a deferral of compensation. But in the catch-up scenario, which is the reverse, there is no deferral.

"(iii) Contributions under the catch-up option may be made on a pre-tax salary reduction basis from any available taxable compensation (including from unused sick days and vacation days) after the employee returns from FMLA leave. The cafeteria plan may provide for the catch-up option to apply on a pre-tax salary reduction basis if premiums have not been paid on any other basis (i.e., have not been paid under the pre-pay or pay-as-you-go options or on a catch-up after-tax basis)."

I do understand your concern, I think, lappinlandis, because in year 2 the payback is, economically, the repayment of a loan, not the purchase of medical expenses. That's probably what's bothering you, but it looks like the IRS's reg writer decided to cut us some slack on this one.

The beauty of this forum is that if anyone has a different view or experience, I'm sure we'll hear about it.

[Silver70]

Glad to see this topic, as i had the same question. So what i am getting from this is an employee that is on leave from November through January, it is ok to proceed with pre-tax catch-up premium payments upon their return in February.

 

If the plan was to double-up payments before their leave to cover January benefits, the January benefits would be post-tax, if collected in the previous year.

 

Thank you,

 

-John