Proper treatment of pre-tax benefit deductions
I thought I knew the answer to this, but maybe not. We started with ADP on 1/1, and while we've been working on getting the benefits module set up, another product has been feeding the benefit deduction amounts. Our company contributes to the employees' costs, and that line is shown as a separate reimbursement amount - a negative deduction. I assumed that for taxation purposes, that reimbursement was netting with the deductions to get the amount that is deducted from gross pay for taxes.
The other day, ADP accidentally turned on our benefits module, and the resulting payroll netted the employer contribution against the employee deductions. I expected everyone's net pay to be unchanged, but that was not the case, which indicated that previously the employer contribution was not getting deducted from the employees' contributions before calculating taxes. As I see it, the taxes should be unchanged regardless of how the benefits/employer contribution are being reported.
So the question is - should the entire employee contribution be deducted from gross before taxes are calculated, or just the net? If employer contributions to health insurance are non-taxable, it would seem that if we net the employee contributions with the employer contribution, the employees are effectively getting a reduced tax break, or conversely are getting taxed on the amount the employer is contributing.
Any guidance on this would be appreciated. I asked our payroll rep how ADP has set this scenario up for other customers, and she said that in talking with her tech people, there's a mix of customers that are set up like us, along with others that are taxing that amount, so that only confuses things further.