Underfunded DCFSA - what action needed?

[MD-Benefits Guy]

Curious to know what action (if any) should be taken in this case.

Employee makes an annual DCFSA election of $4992 back in January of this year.  Given the timing of this election, the benefits system calculates that $208 per pay should be taken from the employee's check based on the 24 payroll deductions.  Unfortunately. the deductions don't start from the paycheck immediately and only 22 deductions were made.  Only $4576 was taken from the employee's paycheck.

This error was only discovered after the last paycheck of 2023 was processed, so there is no easy way to catch-up on the missed contributions.

Given that every dollar that was taken from the employee's paycheck was properly deferred to the DCFSA, is there any action needed?  With no additional payroll cycles left, what options would be available to correct 2023?

 

[MD-Benefits Guy]

So it appears that we may be able to simply make an employer contribution for the underfunded amounts, but curious to know how this should be recoded in payroll?  Additionally, how would these employer contributions impact discrimination testing?

[Brian Gilmore]

I put together an overview on this issue covering a wide variety of options that may be helpful: https://www.newfront.com/blog/correcting-missed-cafeteria-plan-contributions

In short, I don't see any issue with the employer eating the missed contributions as a corrective measure.  This shouldn't affect NDT because employees will have access to the same amount as elected.

Here's the relevant part--

3. Convert Missed Amounts to Employer Contributions: One final approach is for employers to simply forgive the missed employee contributions without requiring the employee to repay the missed amount. There should not be any issue with taking this approach in a corrective context to address a bona fide employer error. This approach is the costliest for the employer, but also the simplest and least likely to cause employee relations issues related to the mistake.

Under this approach, the affected employees will still need to have the full elected coverage (e.g., premium only plan contributions for medical/dental/vision) or balance available for reimbursement (e.g., health FSA or dependent care FSA) despite missing some amount of the contributions associated with that election. In other words, this approach is effectively the equivalent of converting the missed employee contributions to employer contributions as a corrective measure—the employer is covering the cost for the amount they failed to withhold from the employee’s paycheck.

Sample employee communication: During a recent system audit, we discovered that your year-to-date payroll contributions for [Medical/Dental/Vision/FSA/etc.] have been underfunded. We will be correcting this error by forgiving your missed contributions and withholding your corrected elected contribution amount through payroll for each pay period remaining in the plan year. You will still have access to the full benefits you elected for the plan year. Please contact People Operations with any questions.