Our section 125 premium conversion plan year is July 1st to June 30th. An employee just notifed us that when he signed up for his health insurance package in June 1999, effective coverage date of July 1, 1999, he signed up for the premium conversion plan, but just found out that his premiums (back to July 1999) were deducted from his paycheck post-tax, instead of pre-tax (again back to July 1999). We found his enrollment form and verified that he did request premium conversion, but the payroll clerk input it into our payroll system wrong.
I have had discussions with the IRS where they indicated retro-active corrections for administrative errors can be done. However, to make this correction, the payroll system said they would refund his entire premium (from July 1999 to present) untaxed, then collect the entire premium pre-tax. To do this, they need to spread it out over several pay periods, half of which cross over into the new plan year (after June 30th).
Does anyone know whether this type of correction due to an employer error can/cannot be done where it crosses plan years? Can you give me an IRS cite so that I can show the employee?