Payroll Deductions Not Coinciding With Plan Year Elections.

[Guest Jennifer M.]

My company has had a Section 125 plan for several years. The plan consists of medical and dependent care spending accounts and does not include insurance premiums (our health plans are 100% employer paid). It is based on a calendar year. Employees are paid monthly (on the 1st of the month) and deductions are withheld from each check. However, the first deduction each year is withheld from the February 1st paycheck. For example if I elected $1,200 for the 2001 calendar year in my dependent care account $100 would be deducted from my each of my paychecks starting with February 1, 2001, through and including my paycheck of January 1, 2002. The plan was set up and has been this way before I became the administrator. This causes problems with W-2 reporting of dependent care (i.e. in the above example we would report $1,100 on the 2001 W-2 versus $1,200 even though the employee submits receipts and receives reimbursement for $1,200) and in looking for another 3rd party administrator I'm running into problems with no one wanting to come near our plan. I beleive the 2001 deductions should start on the January 1, 2001, paycheck. How can I fix this for 2001 and start 2002 off right?

[GBurns]

I think that you have to solve your payroll problem first.

When the employee gets a check on January 1st, what is he being paid for? If he is being paid for services rendered in the previous year what do you report on the W-2?

The FSA problem should also be the same as a Year-to-Date wages problem.

The solution for both is the same. Decide what you are paying for and when and the report according to the when.

[KIP KRAUS]

GB:

I'm not sure that what a person is being paid for in January is an issue. Employees are on a cash basis accounting therefore if they are recieving pay in January even if it was earned in December I don't think it is an issue. They've earned it but are not entitled to it until January. Does this make sense?

[GBurns]

What I was wondering was:

1. What years W-2 and what Quarter's 941 is the January 1 paycheck allocated to ?

2. What Quarter's 941 is the April 1 paycheck allocated to ?

3. What happens when some one is terminated during the month of December before the January pay date? The issue here relates to constructive receipt etc. that is why the period for which the service is rendered is relevant.

As far as I know the date of the payroll determines the preiod of inclusion for W-2 and 941 etc. This company is accruing otherwise.

The accruing for the FSA should be the same for the W-2 and 941 etc.

[SLuskin]

Would it clear up the problem if payroll were switched to the last day of each month? ie, payroll for January paid 1/31, payroll for December 12/31. Then you would have lots of administrators asking for your business.

[Guest Jennifer M.]

There is no way my company will change the payroll date. The January paycheck is allocated to the current years W-2. (i.e. any paychecks issued between January 1 - December 31, 2000 go to 2000 W-2, any paychecks issued between January 1 - December 31, 2001 paychecks go to 2001 W-2). If someone terminates in December before the January paydate the full Section 125 deductions still comes out of their final paycheck which is still paid in January. And the Section 125 deduction would appear on the same W-2 as the compensation.

Shouldn't the 12 payroll dedutions coorespond with the 12 paychecks issued in the calendar year the election was made for? (i.e. dependent care election for 2001 is $1,200. $100 should be withheld from each of the 12 paychecks issued in the 2001 calendar year, January 1st, February 1st, December 1st). Then the W-2 would also reflect the $1,200.

[Joe Priselac]

Jennifer,

Why don't you do your withholdings over eleven paychecks?

That way you will do your last withholding on the December 1st paycheck. This will enable you to properly report the

withholdings on the W-2. We administer several plans that do withholdings over a lesser number of pay periods than are in the calendar year. For this year, notify all participants that you will be adjusting their withholdings

so that the entire year's withholding will be completed by the December 1st paycheck. If you want to discuss your options in more detail, feel free to contact me.

[Guest KathleenH]

I'm a TPA and I'd be happy to take over the administration of your plan! We'd suggest ignoring the January 1st deduction and withholding over 11 months each year. For the balance of this year, reprorate the deductions so that they end with the 12/1/2001 payroll. I have several clients in this situation and it works well. It also solves the day care "incurred expense" problem because the participants will have had a chance to incur their expenses in January each year before the deduction on February 1st.

[Guest Jennifer M.]

If you have witholdings over only 11 months how do you handle COBRA for medical spending accounts? Currently, our plan runs that the deduction is for coverage through the end of the prior month. I.e. The May 1st paycheck deductions is for the month of April. It seems it would be difficult to explain to employees about COBRA under the 11 paycheck method. Most have trouble understading it now. I think our employees would be too confused if we withheld dependent care elections over 11 months and medical elections over 12 months.

[Jean]

It seems that you have to change the explanation as to how the plan operates. During the enrollment process advise the employees that the withholdings from the Jan 1 check will be for the new year's expenses and not the current years. This probably means you are stuck for the 2001 plan year, but will get you on the right track for 2002.