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 Post subject: Section 125 benefit deductions in arrears while ee is out
PostPosted: Wed Feb 23, 2011 3:20 pm 
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Joined: Mon Jul 12, 2004 10:57 am
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Scenario - An employee is out on an unpaid leave of absence and our company policy allows their section 125 benefit deductions to accumulate in arrears until they come back.

Employee comes back but it is now a new tax year and the deductions we are taking to pay back the missed payments are after tax. Employee wants to know why? I can't find anything specific upon searching that addresses Section 125 tax years? Or would that be addressed in the company's plan document?

It makes sense to me that since we are in a new tax year paying last year's deductions need to be after tax but this employee wants to see a specific rule about this.... Thanks in advance! I'm so tired I can't think anymore...

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Michelle McCaughtry, CPP


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 Post subject: Re: Section 125 benefit deductions in arrears while ee is out
PostPosted: Wed Feb 23, 2011 3:23 pm 
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Joined: Wed May 28, 2003 10:23 am
Posts: 1558
Location: Portland, OR
Section 125 allows deductions to be made up pretax in later years. What you can't do is pre-tax something in advance that would be in the next year.

Edit - but this might only apply in FMLA situations. I am looking for the regs.


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 Post subject: Re: Section 125 benefit deductions in arrears while ee is out
PostPosted: Wed Feb 23, 2011 3:34 pm 
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Joined: Wed May 28, 2003 10:23 am
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Location: Portland, OR
http://edocket.access.gpo.gov/cfr_2010/ ... .125-3.htm

Q-3: What payment options are required or permitted to be offered
under a cafeteria plan to an employee who continues group health plan
coverage while on unpaid FMLA leave, and what is the tax treatment of
these payments?

...

(3) Catch-up. (i) Under the catch-up option, the employer and the
employee may agree in advance that the group coverage will continue
during the period of unpaid FMLA leave, and that the employee will not
pay premiums until the employee returns from the FMLA leave. Where an
employee is electing to use the catch-up option, the employer and the
employee must agree in advance of the coverage period that: the employee
elects to continue health coverage while on unpaid FMLA leave; the
employer assumes responsibility for advancing payment of the premiums on
the employee's behalf during the FMLA leave; and these advance amounts
are to be paid by the employee when the employee returns from FMLA
leave.

...

(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).

...

Q-5: What restrictions apply to contributions when an employee's
FMLA leave spans two cafeteria plan years?
A-5: (a) No amount will be included in an employee's gross income
due to participation in a cafeteria plan during FMLA leave, provided
that the plan complies with other generally applicable cafeteria plan
requirements. Among other requirements, a plan may not operate in a
manner that enables employees on FMLA leave to defer compensation from
one cafeteria plan year to a subsequent cafeteria plan year. See section
125(d)(2).


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 Post subject: Re: Section 125 benefit deductions in arrears while ee is out
PostPosted: Fri Feb 25, 2011 10:05 am 
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Joined: Mon Jul 12, 2004 10:57 am
Posts: 322
Thanks Mindy! This helped immensely...

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Michelle McCaughtry, CPP


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