Pre-Tax Headaches

I just starting working for a new company and have been trying to get up to speed. The insurance is coming up for renewal soon so I’ve been focused on learning what’s in place.

Imagine my surprise to discover that the company may, or may not, have a premium-only plan (POP) in place even though I can see through the payroll records that the employees’ insurance deductions have been taken out on a pre-tax basis. The payroll was originally processed by an employee who is no longer with the company and the newer person now doing the payroll doesn’t have a clue about this.

I’m probably writing about this too soon since I don’t yet know how this will be resolved. I’ve been digging in payroll records for past years but haven’t yet found exactly when this began.

Meanwhile, I’ve talked with the company’s insurance broker and they remember trying to bring in a POP but the company wasn’t ready to spend the money. It seems the ex-employee said they could get a POP through the payroll service for free. However, the payroll service says they have no record of ever providing a POP.

The questions I’m still trying to resolve are:

  • Since a POP is part of the IRS Section 125 tax regs, what are the tax consequences/issues with IRS of doing pre-tax deductions without an official plan in place?
  • Can a POP be put in place this late in the year to at least cover the deductions for this calendar year?
  • When (and why) the switch from after-tax deductions to pre-tax deductions started.
  • What are the possible triggers that would bring this to the attention of IRS?
  • What are the IRS filing rules for a POP?

I could go on but I think you can see the mess I’ve found! It just proves that companies don’t really know what they don’t know when it comes to HR issues!

If you know any answers to my questions, I’d love to hear them…

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Freaked Termination

This is a story from my early days in HR. It was quite a learning experience that has since turned into one of my best (and longest) HR stories.

Joe Smith had been a pharmaceutical sales rep with ABC Company for nearly 3 years but his sales numbers kept going down. He was put on probation that lasted 5 months… it was extended because we had to wait to get sales numbers back and that took extra time. Things didn’t improve so we decided to terminate.  The VP of Sales and his manager both flew to his location and arranged a meeting at a hotel (this was the norm for our nationwide reps).

During the meeting he got really red, started vibrating, jumped up and ran out of the hotel room shouting “catch me if you can.” Since he had a company car, prescription drugs used for samples, and literature, it was necessary to try to talk to him at his home. The VP and manager had to take the time to get a map to find his place and get their car, then they headed out. When they were about 2 blocks from the rep’s home, they saw a police car coming from the opposite direction and it stopped them. The officer made them get out of the car, assume the position, and they were frisked.

It turned out that the rep had called the police and said 2 people (that looked a whole lot like the VP and manager) were on the way to his place to kill him. Once my people had a chance to explain things, they all went to the rep’s home. (Picture about an acre completely fenced in, like a compound.) The gate was locked so they couldn’t actually go up to the front door so they all stood on the street. The rep appeared in the picture window and shouted at them. The officer suggested they wait to talk with him again and everyone left.

The manager and VP went to the airport to catch flights out. Meanwhile, in the home office, we found out that he had cashed a $500 advance on his way home from the hotel. One of our employees got a call from him and passed on the message… “the drugs are at the curb by the street light.” Since these were prescription drugs, we had to get them off the street. We called the VP and was told the manager had already flown out. The VP cancelled her flight and went about renting a storage unit. Our CEO called the police to ask them to pick up the drugs. We later got a call back from the police and were told, “yes, they’re there but too many to fit in the car” so they left them there. The CEO then tried the fire department who did go out and collect the drugs and took them to the storage unit.

Our attorney said we couldn’t consider the car stolen until enough time had gone by (about 3 months). So the CEO hired the “goons” (aka repo guys) to try to get it back. Reports kept coming back that they could never catch him off his property with it and they couldn’t trepass to recover it. In the end, time went by and we were able to declare it stolen. It was returned but was missing the back seat (which he tried to say was never there), had an additional 5,000 miles on it, and was absolutely filthy (lots of dog hair and other things). The fleet people weren’t happy and we took a big hit on it.

It was nearly a year to the day from the termination when we heard from him again. He’d gotten in just under the deadline and  filed a complaint with the Labor Board. At the hearing, the rep tried to claim that he was promised unpaid commissions but the judge threw that out when he saw my offer stated only that he was eligible to participate in the commission program. The rep tried to claim other things and started becoming red and vibrating (sound familiar?) and making the judge so mad, the judge nearly threw the rep out of the hearing. In the end, the judge sided with our company on everything.

No big surprise that the rep then filed a lawsuit. When our attorney and the VP flew down for the deposition, neither the rep nor his attorney showed up. Our attorney went to court to get reimbursement. The rep’s attorney declared that he was no longer working for the rep because he hadn’t been paid. The judge stated he was on the case until he was relieved by the court. Our company was to be reimbursed for the expenses involved in the no-show deposition…  the rep’s ex-attorney had to paid half of those costs before the judge let him off the case.

By this time, we’re about 6 months into the whole process and $30,000 down. Our attorney had discovered that the rep had pulled a very similar stunt with his previous employer but they had settled so it wasn’t discoverable in a background check. Right then our CEO decided to take this as far as needed to get it on the books.

One day our attorney called and told me the case was dismissed. It seems that the rep had written a check to the court system when he filed the suit. The check bounced and he was told he needed to replace it with cash and he never did. Shows you how slow the government moves… it took 6 months for this to come to light! Given our CEO’s mindset, our attorney went to court asking for a judgment so it would always show up on background checks. It was granted, plus the rep was ordered to reimburse for the $30,000 we had spent.

The rep declared bankruptcy, but we didn’t really expect to see the money. During all this, the rep’s wife left him. For nearly a year I would get the occasional call from her telling me where we could locate Joe. We didn’t worry about it until a few months later.

One of our newer reps was approached for information on Joe from someone who believed they worked together. The new rep had never met him. Turns out that he was still listing us as his current employer on his resume. Our attorney sent a letter to stop that.

The final twist on this came several years later when our company was acquired. I went to work for the acquiring company and had starting building a sales team for them. Guess who’s resume I received?! Yep, and he was still crazed… our company was no longer listed on his resume but he had buried the 3+ years he worked for us  into the time frames of the jobs before and after ours. No, we didn’t interview him although we could have had a lot of fun with that since the VP and manager were still working with me!

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Over Or Under The Table

This story is fairly tame but it’s a perfect example of what can happen to a company owner who doesn’t know what he doesn’t know!

ABC Company had only about 6 full-time regular employees but used a lot of part-time temporary help. Ten years in business, the only piece of paper they had on any employee was the W-4. They didn’t even have emergency contact information even though there was a lot of potential for accidents. Eventually the owner, Joe, called me because he decided it was time to look at his risks (plus it turned out that I had just done some work for a company that had recently hired his girlfriend, who made him think about those risks). I helped ABC become bare-bones compliant with just the minimum required paperwork because he didn’t want to take it beyond that. Sigh.

One day, a few months later, I got a call from Joe because he had received an unemployment claim. He was upset and kind of angry because he claimed the filer, Sam, wasn’t even an employee. Turns out that all those part-time temporary helpers were being paid under the table rather than as legitimate employees. As I’m rolling my eyes over this news, Joe mentioned he was stymied over why Sam had claimed much less money than what Joe had actually paid him.

As I continued to ask questions, it turns out that Joe had been paying all these part-timers with company checks, rather than cash. It was a little difficult to speak so he wouldn’t know I wanted to laugh, but I had to inform him that he wasn’t really paying “under the table” if he’s leaving a paper trail of company checks! Once he realized that he’d been treading on legal quicksand, he followed my recommendation of letting the unemployment claim move forward without a fight … and without comment.

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