Are deductions for medical, dental and other insurance pre-tax for our employees?

Maybe. Certain insurance deductions can be pre-tax for employees, but only if the employer has a Section 125 Cafeteria Plan in place. A Cafeteria Plan requires a formal signed plan document, as well as a summary plan description that’s made available to employees. If it’s “always been done that way” but you don’t have a plan document on file, or if the plan document is several years old, it’s important to take action right away. Call us for help.

Why do the wages on my employee’s W-2 Box 1 not match the gross wages for the year?

Employers and employees often find it confusing when gross wages are higher than the wages listed on the W-2. Remember that the W-2 records taxable wages rather than gross earnings. The basic rule of thumb for determining federal and state taxable wages (boxes 1 and 16 on the W-2) is: Gross Pay minus Pretax Deductions (such as medical, dental, 401k). Boxes 3 and 5 on the W-2 may be higher than Boxes 1 and 16 since 401k and other retirement plan deductions are taxable for Social Security and Medicare. Other items such as fringe benefits, Social Security maximum wage base and employer-paid group term life insurance may be a factor, as well.

Our company has a health FSA. Can employees be reimbursed for private insurance premiums, such as Medicare or COBRA?

IRS regulations specifically prohibit health FSAs from reimbursing insurance premiums. It is possible, however, that these premiums may be deducted on the employee’s individual tax return (subject to the applicable deductibility threshold). 

Our company has received a garnishment for an employee that stipulates we withhold a percentage of the employee’s disposable earnings. What does that mean?

In a nutshell, disposable earnings are what is left after legally required deductions. These include all employee tax withholdings and, in some states, deductions for employee retirement plans. Carefully review all paperwork that accompanies any garnishment or child support order. There are likely additional limitations on the amount of earnings that may be garnished and you may need to take these into account in addition. If you’re not sure, call us.

My employee is terminating and has spent more than she has contributed to her Flexible Spending Account. Is it okay for me to withhold the difference from her final paycheck?

Unfortunately, no. The Uniform Premium Provision specifically states that the full annual election amount is available to employees for eligible medical expenses on each day of the plan year. This means that, if the employee has spent more than has been withheld as of the final regular paycheck, those funds can’t be recovered by the employer. A regular FSA deduction may be withheld from the employee’s final paycheck, but the final deduction may not exceed that amount.

The flexible spending account, along with other pre-tax premiums such as medical insurance, is part of a Section 125 Plan, also referred to as a Salary Reduction Plan. In essence, the participating employee elects to reduce her salary by the amount of the annual election. This saves both the employee and the employer tax dollars. The salary reduction is prorated over the course of the plan year but the benefit is in force from the first day. For example, if the employee has a large medical claim early in the plan year and terminates before having the entire year’s premiums withheld, the medical claim is still fully paid. The flexible spending account behaves in exactly the same way. The employee has agreed to a salary reduction, therefore, they have access to all the flexible spending account benefits.

For more detailed information and ideas on how to minimize employer risk, please contact us and we’ll be happy to help.