Gross-up of STD & LTD error?

[MD-Benefits Guy]

I just recently started with a company and noticed that the company was grossing up STD and LTD premiums (adding the premiums into payroll and then deducting the same amount post tax), but it appears that the claims have been paid as if there was no gross-up (taxes were withheld and benefit was reported as taxable income) and the benefits broker has stated that the plans have always been quoted as non gross-up plans and that the plan documents would need to be updated to reflect this as being a gross-up plan.

So my questions are this:

-  What language specifically within the plan document(s) / contracts would need to change?  I've never tried to compare language on a gross-up vs non gross-up plan?  Is there typically language contained in the vendor contract the specifies if the plan(s) should be gross-up?

- For previous years, how or what type of correction should be done?  Not sure if it makes sense to issue W2Cs for everyone, especially when everyone has already filed their tax returns.  Can we simply make adjustments to the claims that were paid and that were improperly taxed.

- Anyone else experience this?  Any suggestions on how to move forward?

 

TIA

[Lynne P]

The disability contracts should be written as "contributory", meaning the employees are paying some or all of the cost of coverage. The carriers typically rate up, even if 100% participation is required. How the employer charges the employee for coverage (pre or post-tax payroll deduction, or gross up then post-tax deduction, or adding imputed income to taxable income) is typically up to the employer and not in the carrier plan documents.

You can check the master policy and the certificate for that language (should state who is paying for the coverage in the ERISA section).  The carrier should verify if 100% participation is required, which is typical even if written as "contributory". The carriers are familiar with employees paying taxes on the premium in order to have tax-free benefits (and the IRS agrees this is the same as paying for coverage). When there is a claim, the claim form then indicates that the employee paid for the coverage (so that the carrier knows the benefits are tax-free).

The company should consult with its tax advisor on any W-2 corrections to the premiums that were taxed.  The broker needs to fix the contract (have written and rated as "contributory") if the company wants employees to have tax-free benefits going forward. Or, the company could leave the contract alone, pay the premium, and any disability benefits are taxable - when employers have difficulty administering a plan properly, sometimes it is best to keep it simple.

Hope this helps.