United StatesOffice of
Personnel Management
The Federal Government's Human Resources Agency
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Subject: Clarification of BAL 01-318 -- Retroactive Adjustments for HB-PC Processing Errors
| We have received several inquiries about Benefits Administration Letter (BAL) 01-318. In that BAL, we revised our policy by requiring retroactive adjustments to taxable income in the event of certain administrative errors involving Health Benefits Premium Conversion (HB-PC). This Letter clarifies one important aspect of the instructions presented in BAL 01-318 for reporting retroactive adjustments to the Internal Revenue Service. |
When Federal Employees Health Benefits Program (FEHB) premium deductions are incorrectly designated as pre-tax or after-tax, BAL 01-318 requires that Federal income tax (FIT) and FICA wages/withholdings be adjusted retroactively to the date that the appropriate HB-PC designation would have been effective. However, IRS regulations as described in Publication 15, preclude the adjustment of amounts reported as FIT withholdings in a prior calendar year in this circumstance. Thus, when it's discovered that FEHB premium deductions have been incorrectly designated in a prior calendar year, FIT withholdings may not be adjusted beyond the beginning of the current calendar year.
The revised illustration below reflects this proviso:
Patricia Dickey had previously waived participation in HB-PC. She marries (a qualifying life event) and elects to participate in HB-PC. Although her election to participate in HB-PC should have been effective on November 18, 2001, her employing agency does not process it. As a consequence, Ms. Dickey remains a non-participant in HB-PC and her FEHB deductions are deducted after-tax. The error is discovered in March 2002.
Ms. Dickey received taxable income of $50,000 in 2001. Since the error occurred, she had $900 in FEHB premiums deductions taken from her pay, $500 of which was deducted in 2001.
Ms. Dickey's tax year 2001 Form W-2 both as reported and as should have been reported would be as follows:
| W-2 | As Reported | As Should Have Been Reported |
| Gross Pay | 50,000 | 50,000 |
| Pre-tax FEHB Premium Deductions | 0 | 500 |
| Wages, Tips, and Other | 50,000 | 49,500 |
| FIT Withheld | 10,000 | 9,900 |
| Social Security Wages | 50,000 | 49,500 |
| Social Security Tax Withheld | 3,100 | 3,069 |
| Medicare Wages | 50,000 | 49,500 |
| Medicare Tax Withheld | 725 | 718 |
Ms. Dickey's APO must adjust her 2002 year-to-date income subject to Federal income taxes and FIT withholdings as well as her FICA wages/withholdings retroactive to the first pay day of 2002. In addition, the APO must file a Form W-2c, correcting her 2001 income subject to Federal income taxes, and her FICA wages/withholdings for 2001. The W-2c reporting for 2001 would be as follows:
| W-2c | As previously reported | Correct information | Increase (Decrease) |
| Wages, Tips, and Other | 50,000 | 49,500 | (500) |
| FIT Withheld | 10,000 | 10,000 | 0 |
| Social Security Wages | 50,000 | 49,500 | (500) |
| Social Security Tax Withheld | 3,100 | 3,069 | (31) |
| Medicare Wages | 50,000 | 49,500 | (500) |
| Medicare Tax Withheld | 725 | 718 | (7) |
In summary, APOs must take the following actions when FEHB premium deductions have been incorrectly designated as pre-tax or after-tax:
If the Error Occurred in the Current Tax Year:
- Adjust current year-to-date income subject to Federal income taxes and FIT wages/ withholdings as well as FICA wages/withholdings retroactively to the date the appropriate HB-PC designation should have been effective.
If the Error Occurred in a Prior Tax Year:
- Adjust year-to-date income subject to Federal income taxes and FIT wages/ withholdings as well as FICA wages/withholdings retroactively to the first pay day of the current tax year.
- Correct income subject to Federal income taxes and FICA wages/withholdings for (the) prior year(s).
If you have any questions regarding this information, we would prefer that you email us at finance@opm.gov, so that we have a record of our communication. You may also phone us on (202) 606-0606.
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Robert A. Yuran, Chief Financial Policy Staff |
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