If an employer missed a premium deduction for insurance, can the employer take it out of the employee's next paycheck?

The answer will depend on a number of facts involved.

It is not uncommon for an employer to make mistakes given the vast state and federal compliance requirements imposed for wage deductions. Sometimes an employer may inadvertently enroll an employee for the wrong election, such as single, when an employee requested family coverage. Or an employer may neglect to deduct for one or more months of an employee’s premium share altogether. This could be due to an error in the enrollment process, a miscommunication or an oversight.

In such situations, an employer may first reference its summary plan description for any mention of underpayments or missed payments to see whether this topic and a procedure are addressed, and proceed accordingly.

If not, and because neither the Internal Revenue Service (IRS) or wage deductions laws give guidance on what is allowable, an employer will want to consult with its attorney and consider the following:

• Premium deductions could be required to uphold the IRS irrevocability rule. Consistent with longstanding rules for cafeteria plans, a written cafeteria plan must provide that elections are irrevocable midyear, except to the extent that the change in status is consistent with those allowed under Section 125. Therefore, taking missed deductions may be seen as consistent with complying with plan requirements.
• The state law on wage deductions should be reviewed to determine if this type of deduction is allowed, and if so, what authorization may be needed. In many cases, the law will not address this specifically, so legal interpretation may be needed.
• The Fair Labor Standards Act (FLSA) allows deductions that take an employee’s wages below minimum wage so long as the deduction is not for the employer’s benefit. In general, insurance premium deductions are for the employee’s benefit, not for the employer’s, and are therefore allowable.
• If the deduction is deemed allowable, the employer could consider taking the missed premium payment in increments, from more than one paycheck, as long as the increments are taken within the plan year because these premiums are generally pre-tax.
• Another, more conservative, approach is to ask the employee to voluntarily repay the employer for the missed deduction, but this would be after tax. However, doing so potentially avoids issues with wage deduction laws.