LTD and Payroll Issue

pwortham

The CFO handled payroll before I was hired Oct 2008. The firm pays for eveyone's LTD but the ee pays the taxes on the benefit.

She grossed up everyone's bi-wkly by their LTD rate and deducted the same rate using a deduction code in ADP. Example:

$2000.00 - bi-wkly
$10.00 - LTD rate for ee
$2010.00 taxed

For 2010, I contacted ADP and requested an earnings code for the LTD rate. Now the ee receives their regular pay of $2,000.00 and earnings code of $10.00 for LTD and a deduction code of $10.00 for LTD. The deduction code takes back the earning that is taxed.

The main reason for my doing this is because it won't mess up an ee electing 5% withdawal from their 401(k). The way she was doing it made $2,010 with LTD gross up instead of the regular amount of $2,000.

The CFO believes what she was doing was fine. I need to find information that states the right way of doing this. I believe and was taught that you shouldn't gross up someone's salary for LTD and then deduct it so they can pay the taxes.

PLEASE HELP ME!!!!

NaeNae55

I am a bit confused. Is your question about whether or not the LTD amount should be included in the 401k amount, or something else? If it is the LTD amount and 401k, then you need to go back to your plan document. Our plan document states W2 wages if you just glance at it, but if you look at several areas and pull them together you find what counts and what doesn't. We do excess life (over $50,000) instead of LTD, but we also have to consider our FSA plan. Using your scenario:

$2000 - bi-weekly ($52,000 annually)
$10.00 - excess life (or LTD) ($240.00 annually)
-$100.00 FSA ($2,600 annually)
$1910 taxed ((49,660 annually)

Our W2 would show $49,660 but 401k would be based on $52,000. Does this help?

dbutton111

Read your 401k plan and see what is included as wages. I would bet that insurance type "negative deductions" such as you're doing is not included as wages. So the employee couldn't contribute based on those wages. In your example, your employee would then only have her/his 401k contribution based on $2000. the way your CFO did it, the employee was able to contribute to the 401k on $2010. If your 401k plan document does not include insurance premium payments to an employee then your CFO may have been putting your plan at risk.

Is your plan audited? If so, why didn't they catch this?