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  1. #1
    fer
    fer is offline Junior Member
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    Unemployment Insurance Benefits

    What is the name of your state (only U.S. law)? California

    I recently terminated employment and was awarded Unemployment Insurance Benefits.

    Upon termination, during the "wrap up" process, I discovered that my employer had been deducting funds from my pay for a Flexible Spending Program in error through-out 2008. I had not questioned the deductions previously because the employer had introduced the benefit as a dependent care insurance made available to cover wages in the event that a dependent becomes ill and requires my time off work to provide care.

    I challenged the deductions and was refunded the money. $5000 and a revised W2 for 2008 tax filings.

    I then reported the refund to the California Unemployment Insurance Administration (EDD).

    In response, the EDD has halted my checks and scheduled a telephone review to determine my continued eligibility. In question is whether this $5000 represents "wages" effecting the weeks of coverage.

    My view is that the funds were "wages" when they were paid but then became in effect a forced "savings" being held by my employer. My employer terms the return of the money as a "refund".

    Any ideas out there?What is the name of your state (only U.S. law)?
  2. #2
    pattytx is offline Senior Member
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    First of all, you never should have signed up for something you didn't understand. It's Dependent Care Assistance, not Dependent Care Insurance. But, moving forward.

    DCA contributions are made on a pre-tax basis. Refunding the deductions created a taxable event. Therefore, you had additional taxable income as a result of the refund, although they may not have been "wages" in the traditional definition of the word.
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  3. #3
    ecmst12 is offline Senior Member
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    Oh and wages are taxed in the year that they're PAID, not the year that they're earned (if those are different).
  4. #4
    fer
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    I signed up for the program based on the specific group explanation description given by the manager conducting the open enrollment process. I and others signed up for it and the written info provided did not contradict her explanation of the program. It simply did not provide much detail. But that is another issue. I am glad I caught it at the time of termination and I suspect the company may have broader issues as a result of such challenges.

    I understand the ramifications of the pay-out in terms of taxes.

    My question is not about either of these. The question is, whether the Unemployment Administration will categorize the pay-out as "wages" per their definition for purposes of eligibility determination.
  5. #5
    Beth3 is offline Senior Member
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    You're going to have to wait and see what the DOL rules, although my guess is that they will categorize these as wages because that's what they were. You simply received the payment for these wages late.
    A person, who is nice to you, but rude to a waiter, is not a nice person. (This is very important. Pay attention. It never fails.)
  6. #6
    pattytx is offline Senior Member
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    I don't normally disagree with Beth3, but I stand by my previous statement that these are not "wages", you were already paid your wages. But the refund IS a taxable event and IS income.

    LYMI, Beth.
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    You have not won the law suit lottery; in fact, you haven't even won the law suit scratch-off.
  7. #7
    ecmst12 is offline Senior Member
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    I think you should consider yourself pretty damn lucky to have gotten the refund at all, since FSA's are generally very strictly "use it or lose it" accounts.
  8. #8
    fer
    fer is offline Junior Member
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    I agree that these are not "wages" in the California precedent cases definition of "wages" because the funds had already been "earned and paid" and "set aside" for my free access whether I accessed them or not. Further, they were "earned and paid" well before my claim for unemployment benefits was ever presented and approved. They had already been deposited into my account, from my employer's account which constitutes "payment". At the time I accessed the funds, they were coming from MY spending account.

    California law does hold that "back-pay" disqualifies eligibility of benefits. However, the distinction between "back-pay" and what occurred here is, in the "back-pay" situation, the employee has not yet been paid the wages. The wages are still in the employer's account until they are actually issued to the employee and until that happens, the employee has no vested interest in the funds (no access to the money).

    One question I do have is how does IRS treat back-pay in terms of taxes. Is back-pay taxed in the year paid or in the "should have been paid" year? In my case, the funds are taxable in the year paid (2008) versus when I actually held the cash in my hands (2009). This latter fact further supports the argument that the funds became "wages", "earned and paid" prior to the 2009 UI claim award.

    Regarding whether I am lucky to get the funds returned to me, actually, I think the employer is lucky I accepted the funds without assuming a more adversarial route considering that there were other employees signed up with the same misconceptions I held and over a 12 month period I had made no request for spending allowing the balance to grow to the maximum allowable. If this was in fact the case with enough others employees and this information were disclosed to monitoring agencies (IRS, Insurance Commissioner, State Tax Board, EDD re payroll taxes) the whole program could be in jeopardy of shut-down for mis-management and the employer could see substantial fines and penalties. I really do not believe the employer was being "nice" to me by agreeing to return the funds. I think it was the wise thing to do on the employer's part.
    Last edited by fer; 03-14-2009 at 03:55 AM.
  9. #9
    fer
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    . . .one more thing about how this employer handled these funds. At the time of my initial inquiry (at the time of termination), the employer quoted the "use it or lose it" phrase explaining that no refund would be due but said absolutely nothing about extension of the plan through COBRA benefits.

    Adding it all together, 1. original mis-information about the plan leading staff to believe the program was an insurance versus an FSA, 2. Allowing the building up of the account to maximum limits saying nothing to the fact that no requests for payment had been made, 3. Not mentioning COBRA at the end but telling me no refund is available due to the "use it or lose it" rule. 4. Nervously refunding the the funds in overnight mail as I became more probative about how the program was supposed to work and seeming really nervous when I phoned to inform them that DOL would be phoning in the process of determining how to categorize the issuance of these funds.

    I always want to extend the benefit of doubt but this smells either of very poor training of managers and benefits administrators or (I hate to think it) something more deliberate and egregious.
    Last edited by fer; 03-14-2009 at 03:31 AM.
  10. #10
    fer
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    Beth3 consider this
    If these funds should be considered payment of "wages" when I was actually forwarded the cash from my employer out of the FSA (in Feb 2009), then what would you term them when they were originally deposited by my employer into my FSA (in 2008)? Were they not "wages" at that time? If they were an employer's "payment of wages" then, how can they be an employer's "payment of wages" again later by the mere fact of moving them from one place of deposit to another? The first time of payment they were paid but not taxed. When they were moved from the tax sheltered FSA to me, they were taxed just like an IRA or 401K plan would be.

    With an IRA or 401K the wages have been paid yet deposited into a protected account for my future beneit (just like in the case of the FSA).

    The question this raises for me is, whether DOL/EDD treats the withdrawel of funds out of 401K or IRA accounts as "wages".
  11. #11
    ecmst12 is offline Senior Member
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    If they were wages then, they're still wages now. And they will be taxed in the year that you received them.
  12. #12
    fer
    fer is offline Junior Member
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    The funds are NOT being taxed in 2009 when I actually took the cash in hand. They are recorded as a part of my 2008 W2 (taxable in 2008).

    The question I was posing is, when did the "payment of wages" occur? The IRS says 2008 (not 2009). I was not asking whether the funds represent "wages". I agree they do. The question is when were they paid?

    "Payment of wages" occured when the employer took the funds out of the employer's Bank of America bank account and deposited them into my Flexible Spendig Account. The payment of wages DID NOT occur when the funds were moved from MY FSA account to my hands in the form of a check.

    Likewise, the event of my placing the check of these funds into my WAMU account does not constitute a "payment of wages". The wages were "paid" when the employer made them available to me by rendering the funds for my use (whether I used the funds at that time or not).

    If DOL/EDD follows the line of logic that the funds constitute the "payment of wages" whenever I take the funds into my hands, then evey time I do (even if six months from now), a "remuneration for personal services" has occured and that simply makes NO sense.

    Each time in that case should mean a taxable event has taken place. The "payment of wages" took place ONE TIME. Any movement of the funds subsequent to that ONE TIME is a mere TRANSFER of the funds.

    Consider this. Suppose I began receiving Unemployment Benefits in November 2008 and in December 2008 my employer deposited $500 of my earnings into an account (any account) for my use. I would HAVE had to report the deposit as income at the time the deposit was made or I would be in violatoin of the reporting requirement. Let's say, I then withdrew those funds and put them in a Wells Fargo account. The Wells Fargo deposit would NOT be a "payment of wages" although the money deposited is still "wages". The deposit would be a mere transfer of wages.

    If I had reported the deposit to DOL/EDD, would they at that time rightfully have considered the WAMU deposit a "payment of wages"? YES.

    Likewise, if I failed to report the payment when the WAMU deposit took place, would I have violated the rule requiring I report all wages while receiving UI benefits.? YES. Would I have had to report to DOL/EDD when I moved those same funds to Wells Fargo. NO.

    Either the wages were paid THEN or they are paid NOW. It can't be both and still be logical and fair.
    Last edited by fer; 03-15-2009 at 03:12 AM.
  13. #13
    pattytx is offline Senior Member
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    The funds are NOT being taxed in 2009 when I actually took the cash in hand. They are recorded as a part of my 2008 W2 (taxable in 2008).
    Then the employer handled it incorrectly. If the refund was made in 2009, it should have been reported as 2009 income.

    I don't know what else to tell you. Call the EDD. Appeal. Whatever.
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    You have not won the law suit lottery; in fact, you haven't even won the law suit scratch-off.
  14. #14
    fer
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    Mmmm. . .you raise an interesting point. However, I don't agree.
    The act of deducting the taxes for government compliance purposes DOES NOT factually change the employer's payroll distribution year from 2008 to 2009. THE WAGES LEFT THE EMPLOYERS payroll funds and were set aside for me albeit in a TAX PROTECTED STATUS in 2008 (not 2009) This is reflected in each of my 2008 check stubs. Call it constructive payment in 2008 if you want, but it was still payment.

    ********

    Here is a definition from SSA:
    1302. Actual or Constructive Payment of Wages

    1302.1 When are wages considered "paid"? Your wages are generally considered paid when they are "actually" or "constructively" paid.
    1302.2 What does "actually paid" mean? Actual payment occurs when you are actually paid in the form of cash, check, bank deposit, or similar form other than cash.
    1302.3 What does "constructively paid" mean? Your wages are constructively paid when: They have been credited or set aside for you, and you can get them at any time. It does not matter when or how you receive payment, just that you have access to your wages when you want them; or Your employer intends to pay, set apart, or credit the wages and is able to pay you when due, but fails to do so because of a clerical error or mistake in the mechanics of payment.
    Last Revised: March, 2001

    ********

    State and Federal governments require that the employer submit tax amendment forms showing the payout as a part of its 2008 tax filings. These forms are used to report "overdeductions" or "underdeductions" for the payroll year in question. In this case, the employer will report an "underdeduction", in the amount of $2000 and my tax filings will reflect the same.

    Compare this to the withdrawal of funds from a 401K or IRA. Retirement funds are taxed (treated as income?) in the year withdrawn (along with a 10% penalty) and NOT when the funds are originally deposited. Likewise, FSAs hold pre-tax dollars.

    However the difference between the FSA and retirement funds is that the former was never intended for cash payout directly to the employee, therefore never intended to be taxed (use it or lose it).

    Retirement funds on the other hand are expected to be accessed occasionally as needed as they involve long-term commitment versus the fluid in-and-out movement of FSA funds.

    My situation presents an anomaly. An ERROR occurred which had me engaged in a government tax benefit program that the government did not intend for me.

    Upon discovering the error, the employer CORRECTED IT by redirecting my ALREADY EARNED AND PAID wages to me and reversing all matters associating me with the program (including the tax protection piece).

    In effect, the employer REVERSED the establishment of the FSA making it as if the account had never been established in which case I would have been paid the funds in question over the course of the year 2008 per each of my 52 weeks of paychecks AND the employer would have deducted taxes as usual per each check processed. I then would have been issued a 2008 W2 that accurately reflected these earnings and filed my 2008 taxes as normal.

    A reversal back to what should and would have been meant delivering the cash to me AND deducting the proper taxes. In hindsight, I could have avoided all the trouble and had the employer transfer the wages to my 401K.
    Last edited by fer; 03-15-2009 at 07:46 PM.
  15. #15
    pattytx is offline Senior Member
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    Whatever. Our opinions all together won't buy you a cup of coffee. Argue your case to the EDD.
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