2002-01-23 CC Packet - Laserfiche WebLink

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I , January 16, 2002 Mayor and Council City ofCenterville 1880 Main Street Centerville, Minnesota 55038 Dear Mayor and Council: On October 24, 2001, we were engaged to research how deferred compensation payments were made and the payroll processing procedures applied to the payments. The City implemented the deferred compensation plan in 1996 under Section 457 of the Internal Revenue Code. Beginning in 1996, the City allowed employees a monthly limit for health insurance. If the full amount was not used, the difference was allowed to be contributed to the employees deferred compensation account. Two codes were set up on the finance system to account for deferred compensation. One was identified as 102, to track the employees contribution. The other was identified as 506, and was used to track the amount contributed to deferred compensation in lieu of health benefit. We accumulated totals recorded in these categories by year for each employee. This information came from the payroll system. The totals were then compared to the W-2 forms given to each employee and filed with the Internal Revenue Service (IRS). It was evident that the City did not withhold Social Security and Medicare on the 506 code. The City will need to remedy this by amending the W-2's for each employee tor each year. This will correct the earnings record for each employee. The City will then need to make the payment for the total 15.3 percent withholding in the first quarter 2002 and file a Form 941 C along with the regular Form 941. The City does have a right to ask for the employee's share of7.65 percent ofthe 506 benefit, but this may be difficult since it was a City error and many ofthe employees affected no longer work at the City. The IRS literature makes it clear that the employer has the responsibility to remit the total 15.3 percent and the right to withhold half of it tram the employee's earnings. A summary ofthe totai underreported deferred compensation is included as Attachment A. Another question for consideration on whether the deferred compensation in lieu of health insurance was a City contribution or part of employee wages. Phone calls made to the League of Minnesota Cities and other clients offering similar plans had originally indicated that they were part of wages, hut further information received today indicates that they may be treated as a City contribution. This would be significant because a City contribution to an employee-deferred compensation requires participation in the State Deferred Compensation Plan. This plan is limited to $2,000 and requires an employee to match equal to the City contribution. There were several cases where employees received over $2,000 of benefit and others that did not contribute the required match. Several sources have given different answers to this question. I discussed this with an attorney at the Attorney General's office and we felt the best remedy would be to request an Attorney General opinion on this matter and how to handle past year transactions, if any change would be required.