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Health, Accident , and
Retirement Benefits
Section 4
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Health Insurance Plans
 Traditional Health Insurance
 Fee for service arrangement
 HMO – Health Maintenance Organization
 Go to HMO facilities for medical care
 Select from a pool of doctors who are members of the HMO organization
 POS – Point of Service
 Select a primary care physician
 Allows access to non-HMO health care facilities
 PPO – Preferred Provider Organization
 Lower cost if using network doctors
 Higher cost if using out-of-network doctors
Health Insurance Plans
 ACA Affordable Care Act
 ALE – Applicable Large Employers
 Average number of employees in a year over 50 or more
 Provide minimum essential coverage or be penalized
 Full time versus part time
 2015 must offer coverage to 70% of those eligible employees
 2016 must offer coverage to 95% of those eligible employees
 Additional reporting required for 2015 submit in early 2016
 6056 Informational Return
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Proposed forms 1095C and 1095B
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Reports on each full-time employee for one or more months during the calendar year
certain information on coverage offered.
Reporting times are the same as W2 nd W3
Penalties for failure to file similar to W2 penalties
Employer Notice to Employees
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Notice of coverage and of availability of Markepplaces
 Due to employee by October 1, 2013
Health Insurance Plans - W-2 Reporting
 W-2 Reporting of Cost of Employer-Provided Health Coverage
 Reported in W-2 Box 12, using code DD
 Calculating the Reportable Cost of Coverage
 Premium charged method
Amount charged by the insurer for an employee’s coverage
 COBRA applicable premium method
 COBRA applicable premium amount s for coverage provided
 Must satisfy requirements of IRC 4980B(f)(4)
 Modified COBRA premium method
 May be used when the Employer subsidizes the cost of COBRA
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Health Insurance Plans
Tax Treatment of Plan Contributions
 Employers with no section 125 plan who give employees a choice
between receiving a portion of their wages as compensation or having
the amount paid to cover health insurance premiums must include the
amount in the employees income.
 If an employer reduces an employees salary and uses those amounts to
pay for health insurance premiums and then reimburses the employee
for the amount of the reduction, the employer must include these
amounts in the employees income.
 Employer contributions are generally excluded from the employees
income
 Employee contributions are included in income unless the
contributions are made through a valid salary reduction plan under IRC
125
Health Insurance Plans
Tax Treatment of Plan Contributions
 Mandatory salary reduction contributions by current employees to pre-
fund a trust created by their union to pay for health insurance coverage
for retired employees are excluded from the current employees income
under IRC 106.
 Employee accident or health insurance plan benefits received from an
employer as direct or indirect reimbursements for medical expenses are
excluded from the employees income. The employees expenses must
be for medical care as defined by IRC 213.
Health Insurance Plans
Tax Treatment of Plan Contributions
 Any reimbursements received in excess of the medical
expense are included in the employees income.
 Employer health insurance benefits provided through a
third party insurance company have no nondiscrimination
requirements. The plan may be tailored to favor highly
compensated employees.
 Health insurance benefits provided from an employer that
is self-insured and reimburses its employees’ medical
expenses from its own funds may not discriminate in favor
of highly compensated employees. If the plan is
discriminatory, amounts paid to highly compensated
employees must be included in the income.
Section 125 Cafeteria Plans
 A cafeteria plan, as defined in Section 125 of the Internal Revenue Code, is a
plan in which all participants are employees who choose from a minimum of
two or more benefits that consist of cash and qualified benefits.
 Qualified Benefits include:
 Accident and Health plans
 Dependent care assistance programs
 Group-Term-Life insurance
 Short –Term or Long-Term disability coverage
 Health Savings accounts
 Elective contributions to a section 401(k) plan
 Elective vacation days
 Cash
 Flexible Spending Accounts
 Adoption Assistance
Section 125 Cafeteria Plans
 Benefits not permitted in a Section 125 Pan
 Educational Assistance plans
 Scholarship and fellowship grants.
 Rides in commuter vans
 De minimis fringes
 No- additional-cost services
 Employee discounts
 Working Condition fringes
 Deferred compensation arrangements (except a qualified 401(k) plan,
Health Savings Accounts, and Flexible Spending Accounts)
 Qualified transportation fringe benefits
Section 125 Cafeteria Plans
 Flexible Spending Accounts
 Funded by either Flex dollars or Flex credits (employer contributions)
 Generally, employees must make an irrevocable benefit election before
each plan year begins. Changes during the plan can be made only
under limited circumstances.
 Employer contributions
 Excluded from employee’s income
 Not subject to federal income tax withholding or employment taxes
 Pre-tax contributions
 Excluded from employee’s income
 Post-tax contributions
 Included in employee’s income, however, benefits received are not
Section 125 Cafeteria Plans
 Nondiscrimination Testing
 The plan must not discriminate in terms of eligibility,
contributions, or benefits in favor of highly compensated
individuals, or participants, or key employees.
 A plan that is discriminatory in favor of highly compensated
individuals , employees, participants, or key employees are not
disqualified and do not have negative tax consequences for other
participants. But those highly compensated participants and key
employee participants lose the tax benefits of the plan.
 Special Health Benefits Test.
 Concentration Test
Section 125 Cafeteria Plans
 401(K) plan
 Pre-Tax contributions are not subject to federal income tax
withholding , but are subject to FICA, MED, and FUTA
 Cash received instead of selecting benefits
 Subject to federal income tax withholding as well as all employment
taxes.
Long Term Care Insurance
 Generally treated as accident and health insurance contracts
 Benefit amounts received are excluded from income
 Per Diem Payments
Capped at $330 per day or $120,450 annually (2014)
 Long Term Care coverage is not subject to COBRA
 Is not a qualified benefit that can be offered as part of a cafeteria
plan under IRC 125
 Long term care coverage that is provided as part of a flexible
spending arrangement is included in the employee’s gross income.
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COBRA Health Insurance Continuation
(Consolidated Omnibus Budget Reconciliation Act of 1985)
 COBRA applies to employers with 20 or more employees on a typical
business day
 The purpose of COBRA is to allow qualified beneficiaries the opportunity
to elect continued group health for specified periods of time under
specified qualifying events
 Qualifying Event
 Death of the covered employee;
 The covered employee’s termination of employment (for reasons other than
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gross misconduct) or reduction in hours worked;
Divorce or separation of the covered employee;
Entitlement of the covered employee to Medicare benefits (upon enrolling in
the program);
A dependent child losing that status; and
Bankruptcy proceedings that cause a retired covered employee or the
employee’s dependents to lose coverage.
COBRA Health Insurance Continuation (Continued)
 Duration of Continuation
 Termination or reduction of work hours – 18 months (24 months if the
reason for absence is military service)
 Beneficiary is disabled – 29 months
 Death, divorce, separation, loss of dependent child status or two or more
qualifying events – 36 months
 Premium Requirement:
 102% of health care premium rate. The 2% is allowance for additional
administrative costs.
 Up to 150% of premium cost for qualified disabled dependents from the 18th
up to the 36th month of coverage
 Coverage Election
 The election period begins the day the previous coverage terminates
 The election period lasts 60 days from that time (no longer)
 ARRA 2009 COBRA premium subsidy ended May 31, 2010
Family and Medical Leave Act
 Applies to employers with 50 or more employees
 Guarantees employees:
 12 weeks of unpaid leave in a 12 month period.
 Continuation of health benefits while on leave – employee is responsible
for premiums during leave (may be required to pay entire premium, not
just EE portion
 Eligibility
 Employed for at least 12 months (can be non-consecutive)
 Has worked at least 1250 hours within previous 12 months
 Expatriates are not covered – employees must work within the United
States or any of its territories and possessions.
Family and Medical Leave Act
 Employees returning from leave are entitled to their previous job or one
that is equivalent with no loss of pay or benefits accruing before the
leave.
Sick Pay
 Essential purpose is to replace the wages of an employee who cannot
work because of an illness or injury.
 Sick Pay under a Separate Plan
 Short Term Disability
 Long Term Disability
 Third Party Sick Pay
 How much is taxable?
 Any benefits provided that are attributable to employee after tax
contributions are not taxable to the employee.
 Benefits that are attributable to employer contributions or to employee pre
tax contributions through a cafeteria plan are taxable income to the
employee.
Sick Pay
 How much is taxable?
 Where the employer and employee both contribute to the
premiums for a disability plan, the taxable portion of benefits
received is the amount attributable to the employer-funded portion
of the premiums.
 Where the employer and employee both contribute to a group
insurance policy, special rules apply to determine the amount of
benefits included in the employees income. If the employer knows
the net premiums paid for at least three policy years, the formula for
calculating the taxable portion is as follows:
 EE’s sick pay x employer-paid premiums for last 3 years
Total premiums for last three years
See IRS Pub. 15-A
Sick Pay
 Social Security, Medicare, and FUTA taxes do not apply to amounts paid under
a definite plan on or after the termination of the employment relationship
because of death or disability retirement.
 Sick pay paid to the employee's estate or survivor after the calendar year of the
employee's death is not subject to Social Security, Medicare, or FUTA taxes.
 Sick pay paid to the employee's estate or survivor at any time after the
employee's death is not subject to federal income tax withholding, regardless of
who pays it.
 See IRS Publication 15a
Sick Pay - Responsibility for income withholding and
employment taxes
 Payments made by employer
 Employer self-insured
 Withhold federal income tax based on the employees most recent
W-4.
 The employer must also pay it’s share of FICA, MED, and FUTA tax
and withhold the employee’s share for all payments made within 6
calendar months after the end of the last month during which the
employee worked for the employer.
Sick Pay - Responsibility for income withholding and
employment taxes
 Payments made by employers agent
 The employer pays the third party agent on a cost-plus-fee basis but retains
the insurance risk.
 Payments are treated as if made by the employer.
 The third-party agent may treat the payments as supplemental wages and
withhold federal income tax at the flat rate of 25%. The employer retains
responsibility for FICA, MED, and FUTA withholding and payment unless
it enters into an agreement with the agent to be responsible for
employment taxes.
Sick Pay - Responsibility for income withholding and
employment taxes
 Payments made by a third party who is not an agent
 Employer contracts with a third-party to make disability payments and the
third party bears the risk of insuring the employees. Third party receives
premiums from the employer. The third party is not required to withhold
federal income tax from employee payments unless the employee requests a
certain amount be withheld by furnishing the third party with form W-4S.
If the employee provides a W-4S the third party must begin withholding
with the first payment made at least 8 days after the form is provided. Form
W-4S allows the employee to request a flat dollar amount to be withheld.
The minimum withholding is $20.00 per week and after withholding the
employee must receive at least $10.00.
 If a payment is smaller or larger than the regular payment then the
withholding changes by the same proportion as the payment.
Sick Pay - Responsibility for income withholding and
employment taxes
 Payments made by a third party who is not an agent
 The third party must also withhold and pay the employee’s share of FICA
and MED for each payment within 6 months after the end of the last
month the employee worked for the employer.
 The third party is also responsible for the employer’s share of FICA, MED,
and FUTA unless it transfers liability back to the employer.
Sick Pay
 Permanent Disability Payments
 Subject to federal income tax withholding by the party making the
payments to the extent the employer paid the premiums or the employee
paid the premiums with pre-tax dollars.
 Workers’ compensation insurance
 Payments received by the employee are not subject to withholding or
employment taxes. Payments must be for injuries suffered on the job.
Questions ?
RETIREMENT BENEFITS
AND DEFERRED
COMPENSATION PLANS
Section 4
Retirement and Deferred Compensation Plans
 401(a) - Qualified Pension & Profit Sharing Plans
 Defined Benefit Plans , Defined Contribution Plans
 401(k) - Cash or Deferred Arrangements
 403(a) or 403(b) - Tax-Sheltered Annuities
 457 - Deferred Compensation Plans – Public Sector and Tax-exempt
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groups
501(c)(18)(D) - Employee Funded Plans
IRA - Individual Retirement Accounts
408(k) – SEP - Simplified Employee Pensions
408(p) – SIMPLE Plans - Savings Incentive Match Plans for
Employees of Small Employers
ESOP - Employee Stock Ownership Plans
Nonqualified Deferred Compensation Plans
•Defined Benefit Plan
– Payroll Dept Responsibilities. Maintain records of hours worked,
compensation earned, and dates of birth and hire.
–Employee benefit based on employee’s age, compensation level, and years of
service
–Plan formulas are geared to retirement benefits and not contributions
–Annual Compensation Limit for 2012 = $250,000
–Annual benefit limit for 2012 = $200,000
•Defined Contribution Plan
–Individual Accounts
–Contribution by Employer
–Contribution by Employee (but not always)
–Annual Compensation Limit for 2012= $250,000
–Annual Contribution Limit = The lesser of $50,000 or 100% of the
employee’s compensation for the year (up to the annual compensation limit).
401(a) Profit Sharing Plans
 Profit Sharing Plans
 Allows employees to participate in company profits
 Discretionary contribution based on a selected formula by
employer
 Defined contribution plan only
Amounts to Remember for 2014
Plan
Type
Annual
Deferral
Limit
Annual Catch
up Limit
Annual
Compensation Limit
Annual
Contribution Limit
W-2 Box 12
Code
401(k)
$17,500
$5,500
$260,000
$52,000
D
403(b)
$17,500
$5,500
$260,000
$52,000
E
457(b)
$17,500
$5,500
$260,000
$52,000
G
501(c)
$17,500
$5,500
$260,000
$52,000
H
IRA
Generally
$5500 –
Based on
AGI
$1,000
Phased – see 4-126
$5,000
408(k)
SEP
$17,500
$5,500
$260,000
$52,000
408(p)
Simple
$12,000
$2,500
$260,000
ESOP
The lesser of 100%
of annual comp. or
$52,000
F
S
•Employee contributions are pre tax and not subject to income tax but are
subject to employment taxes(FICA, MED FUTA)
•Contributions, as well as money earned from investing them , are not
subject to income tax until they are withdrawn
•In addition to employee contributions, employers may contribute matching
amounts. Employer matching amounts are not subject to income or
employment tax.
• Early distribution penalty equal to 10% excise tax
•Public Schools, Tax Exempt Charities, Religious, Educational Organizations
•Contribution limits set by the economic growth and tax relief reconciliation act
(EGTRRA)
•Employee contributions not subject to Federal Income Tax but are subject to
employment taxes.
•Special provision for employees over 15 years of service (can exceed the maximum
elective deferral amount)
•Additional information available – IRS Publication 571
•Eligibility – Only individuals performing services for the
employer (including independent contractors)
•No discrimination testing
•EGTRRA Limits
•Contributions placed in tax exempt trust for employees and
beneficiaries
•Distributions cannot be made before employee reaches 70 1/2
years old, separation of employment (retirement) or employee
has unforeseeable emergency.
•Employee contributions not subject to Federal Income Tax
•EGTRRA Limits
•Employee contributions not subject to Federal Income Tax
•Defined contribution plan
•Solely funded by employee contributions
•Maximum deferral limit is reduced by other cash or deferral
arrangements (CODAs) maintained by the employer
•EGTRRA Limits
•After tax amount deductible based on participation in other
plans
•Deductibility based on Adjusted Gross Income
•Employer contributions included in income, but not subject to
federal income tax
•Defined Benefit or Defined Contribution Plan
•Usually direct deposit contributions – not payroll deductions
•Can be SIMPLE plan
•ROTH IRA
–Contributions are not deductible from income
–Distributions are not included in income if certain criteria is met
•Employer’s who cannot provide traditional plans
•Is an IRA
•Employer must make contribution to plan on behalf of
employee based on guidelines
–21 years of age
–Worked for employer 3 out of last 5 years
–Earned at least $550 in 2012
•Salary reduction agreements limited to EGTRRA
•Employees can elect a salary reduction agreement if plan
was setup before 1997.
•Small Business Job Protection Act of 1996
•Must allow eligible employees to participate
–Employer with no qualified retirement plan and less than 100
employees
–Received at least $5,000 in compensation during any 2 prior
years
–And expect to receive $5,000 in current year
–EGTRRA Limits
•Fully vested at time of contribution
•Non-Discrimination testing
•EE’s must have 60 days before year begins to make changes to
contribution
•Not subject to Federal Income Tax
•Must meet 401(a) requirements
–Participation
–Vesting
–Non discrimination
•ESOP buys stock with employer contributions or borrowed /
leveraged funds
–Designed to invest primarily in employer’s stock
•Value of employee account changes based on stock value
•Not subject to federal income tax or FICA, MED, or FUTA
Nonqualified Deferred Compensation Plans 409(a)
 An employer plan designed to defer compensation until a
later date and that does not meet the requirements of IRC
401(a)
 Plan can be Funded or Unfunded
 Funded – Employer makes contributions to the plan
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Subject to Federal Income tax Withholding when the
employee’s interest is vested
 Unfunded – Employers promise to make payments at a
latter time
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Not subject to Federal Income Tax Withholding until the
payments are made
Nonqualified Deferred Compensation Plans
409(a)
 Most nonqualified deferred compensation plans are unfunded.
 Amounts deferred are subject to federal employment taxes (FICA,
MED,FUTA). W-2 Box 3, 5
 Amounts paid that were deferred in a prior year are subject to federal
income tax withholding. W-2 Box 1
W -2 Reporting Requirements
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MSA – Box 12 – Code R
HSA – Box 12 – Code W
Non-taxable Sick Pay – Box 12 – Code J
Dependent Child Care – $5000 - Box 10
Adoption Assist - $12,650 – Box 12 – Code T
401(k) – Box 12 – Code D
403(a) or 403(b) – Box 12 – Code E
457 – Box 11 or Box 12 – Code G
501(c) – Box 12 – Code H
408(k) – Box 12 – Code F
408(p) – Box 12 – 401(k) = Code D, IRA = Code S
409(a) – Box 12 – Code Y or Z