Section 125 Deductions

Michelle

We are implementing new benefits effective 5/1/01, which will fall under our 125 program. We run an AS400 system and our problem is that we're not confident that the programming will be complete by the deadline to implement the new deductions. Our IT dept suggested skipping deductions for the first paydate in May and taking a double deduction on the second check in May, but I told them that that would go against the 125 rules. I know that under the 125 guidelines, you are only allowed to back deduct in the case of a newborn. I also know that most companies do not observe that rule.

We thought about setting the new deductions up as misc. deductions, but if we go that route, they won't be pre-taxed. Does anyone know of any loophole that I may be missing? I really don't want to give our employees a free paycheck!

Thanks for any suggestions!

Scott Ruth

You should look into it further, but as I understand the Section 125 rule
against retroactivity, the key is the timing of the participant's election with
respect to the provision of benefits and the pretax payroll deduction. Thus, if
all elections are made before 5/1/01 and the period of coverage begins 5/1/01,
as long as you collect the premiums after 5/1/01, it doesn't matter if you skip
the first paydate and collect the whole premium for May on the second paydate in
May. You will have to be careful not to let any family status election changes
through in May retroactive back to May 1.

I think your main concern is letting employees know how it is going to be done
in advance so they are not suprised. Also, there may be state law withholding
authorization concerns, and to be safe you may want to include a specific
authorization to double deduct in May in your election form.

Scott Ruth
Miller & Martin LLP