Health, Accident, and
Retirement Benefits
February 20, 2010
Sharon Goldsand, CPA, CPP
Payroll Manager
815-754-6548
Sharon.goldsand@Tegrant.com
Types of Benefits Offered by Most
Employers




Health Insurance
Sick Pay
Worker’s Compensation Insurance
Retirement and Deferred Compensation
Plans
Health Insurance



Traditional Health Insurance Plans
Health Maintenance Organizations (HMOs)
Preferred Provider Organizations (PPOs)
Tax Treatment of Accident and Health
Insurance Contributions

Non-Taxable Contributions


Contributions made by an employer
Contributions made under a Section 125 Cafeteria Plan


If employer reduces salary and then reimburses premium to
employee, then the premium is taxable to the employee
Premiums must be for Employee, Spouse, Dependents (on
1040)

For purposes of this provision dependent will continue to apply
to a person who is receiving more than ½ his/her support from
the taxpayer even if he/she earnings more than the annual
exemption.
Tax Treatment of Accident and Health
Insurance Contributions

Premiums for life partners are federal taxable unless
recognized as a spouse under state law. If the
employee’s domestic partner is of the same sex as the
employee, the partner does not qualify as the
employee’s spouse for federal tax purposes
regardless of the state law. The partner may qualify
as a dependent if partner receives more that ½
support from employee, lives with employee, and the
relationship does not violate local law.
Tax Treatment of Accident and Health
Insurance Contributions


What Taxes are Involved
Federal Income Tax

Employment Taxes




Social Security
Medicare
FUTA
Illinois follows the federal government – some
state and local jurisdictions do not.
Tax Treatment of Accident and Health
Insurance Contributions

In Order to exclude from employment taxes
(Social Security, Medicare and FUTA)

Must be under a plan – based on one of the
following





Plan is written
Referred to in employment contract
Employees contribute to the plan
Employer contributions are made to a separate fund
Employer is required to contribute
Tax Treatment of Accident Health
Insurance Benefits



Benefits received directly or indirectly reimbursing
the employee for medical expenses incurred are not
included in employee’s income
Any reimbursements in excess of actual expenses
are taxable income to the employee
Payments for loss of limb or disfigurement as part of
AD&D are not included in income (payments must
not be related to time lost from work).
Nondiscrimination Requirements for
Health Insurance


If insurance is provided through third party
insurance company there is no requirement.
If employer is self-insured (reimbursing
employees’ medical expenses from its own
funds), employer may not discriminate in
favor of highly compensated employees in
either benefits or eligibility.

IRS Code Section 105(h)
Discriminatory Plan

Amounts paid to highly compensated
employees must be included in taxable
income

Who is Highly Compensated



5 highest-paid officers
Owner of more than 10% of employer’s stock
Top-paid 25% of employees
Discriminatory Plan

Although discriminatory reimbursements are
taxable to the highly compensated
employees receiving them, they are not
subject to federal income tax withholding or
employment taxes.
Long Term Care Insurance

Treated as accident and health insurance
under “Health Insurance Portability and
Accountability Act of 1996”


Employer provided coverage is excluded from
income
Benefits are excluded from income


If per diem – excludible limit is $290/day in 2009
(indexed for inflation)
Excess will be excluded to the extent of actual cost of
care
Long Term Care Insurance

Restrictions



Not subject to COBRA
Cannot be part of Cafeteria Plan
If part of flexible spending arrangement it is
included in employee’s taxable income
Consolidated Omnibus Budget
Reconciliation Act of 1985 (COBRA)

Requires health plan sponsors to provide
employees and their beneficiaries with the
opportunity to elect continued group health
coverage for a given period should their
coverage be lost due to “qualifying event”


Applies to employers with 20 or more employees
(FTEs) on typical business day.
Coverage period generally is 18 to 36 months.
COBRA

Coverage same as provided to similarly
situated beneficiaries who have not suffered
the qualifying event.


Employees who purchased health care coverage
under a cafeteria plan (including flexible spending)
are eligible for COBRA continuation at level of
coverage before event.
Long Term Care Insurance is not included in
COBRA
COBRA
Qualifying event – period of coverage


Death of covered employee – 36 months
Covered employee’s termination of employment or
reduction in work hours (other than gross
misconduct) – 18 months



If the reason for absence is employee’s military service –
24 months
If another qualifying event occurs (other than employer’s
bankruptcy) period extends to 36 months.
Qualified beneficiary (employee or dependent) is disabled
under Social Security Act during the first 60 days of
continued coverage - 29 months

Another qualifying event during 29 months (other than
employer bankruptcy) extends coverage to 36 months
COBRA Qualifying event – period of
coverage

Employer’s bankruptcy




Coverage is life of retiree or retiree’s spouse.
Once retiree dies – 36 months for retiree’s spouse
and children from date of retiree’s death
Divorce or separation of covered employee
(date of divorce is the qualifying event) – 36
months
Dependent child losing that status – 36
months
COBRA

Premium Requirements

Can be up to 102% of the group premium paid for
similar coverage under the plan by the employer
and employees.


The maximum premium increases to 150% for disabled
qualified beneficiaries after the 18th month of
continuation coverage.
Premium payment may not be required earlier
than 45 days after the qualified beneficiary elects
continuation of coverage
COBRA

Election and notice provisions




Election period must last at least 60 days from the date
when coverage was terminated or the qualified beneficiary
receives notice – which ever is later.
Plan must provide written notice of COBRA continuation
coverage when coverage begins
Employee or Employer must notify plan administrator of
qualifying event, responsibility and timing depends on the
event
Once aware of the qualifying event, plan administrator has
14 days to notify qualified beneficiaries of their rights.
COBRA

Penalties for Noncompliance

Employers subject to $100 per day penalty for
each qualified beneficiary (maximum $200 per
day per family affected by same qualifying event).


Penalty will not be imposed if failure is due to
reasonable cause and is corrected within 30 days of
discovery
Unintentional failures due to reasonable cause –
maximum penalty is lesser of 10% of employer
premiums for group health plans during preceding
taxable year to $500,000
Savings Plans and Reimbursement
Accounts for Medical Expenses

Archer MSA (Medical Savings Accounts)

Health Reimbursement Arrangements (HRA)

Health Savings Accounts (HSA)
Medical Savings Accounts (Archer MSA)

Established by Health Insurance Portability and
Accountability Act (HIPA) of 1996

Small Employers (no more than 50 employees). Eligibility can
continue for all employees until the year after the employer has
200 employees. At that point only employees currently enrolled
can continue to contribute




Employee must be covered only by high deductible health insurance
plan.
For 2009 annual deductible $2,000 – $3,000 for individual $4,000 $6,050 for family.
Maximum out-of-pocket expenses can be no more than $4,000 for
individual coverage and $7,350 for family coverage.
Cannot be part of Cafeteria Plan
Tax Treatment of Archer MSA

Contributions can be made by employer or
employee (not both)

Employee contributions are deductible from
income on personal tax return.


They are subject to federal income tax withholding and
employment taxes.
Employer contributions are excludable from
income.
Limitations on Contributions to Archer
MSA




Employee deduction cannot exceed employee’s
compensation
Deduction or Contribution is limited to 65% of the
plan deductible for individual coverage or 75% of the
plan deductible for family coverage.
Employer contributions must be the same amount
for each employee based on either dollar amount or
percentage of applicable deductible.
Employer contributions in excess are included in
income.
Archer MSA – Tax Treatment of
Distributions

Distributions from MSAs are excluded from
income if they are for medical expenses
incurred by employee or his/her dependents.



Person for whom expenses are incurred must be
covered only by high deductible health plan.
Distributions included in income are subject to an
additional 15% tax unless made after age 65,
disability, or death.
MSA Trustee or Custodian is not required to
determine use of distributions; this is the
responsibility of the account holder.
Archer MSA – Information Reporting
Requirements

Employer Contributions




Employee Deductions




Box 12 R on W-2
Plan trustees report on 5498-MSA
Reported on employee’s personal tax return
Box 1, 3 and 5 on W-2
Employee takes deduction on personal income tax return
for amount contributed
Plan trustees report on 5498-MSA
Distributions

Plan trustees report on 1099-MSA
Health Reimbursement Arrangements
(HRA)




Paid solely by employer (not salary reduction
election or cafeteria plan)
Not limited by number of employees or only to
employees who have High Deductible health plans.
Reimburses employee for medical care expenses –
for employee, spouse & dependents.
Reimbursements up to maximum dollar amount with
unused portion carried forward to subsequent
coverage periods.
HRA

Benefits under HRA – generally excluded
from employee’s gross income

Qualifications for exclusion



May only reimburse expenses for medical care as
defined in IRC section 213(d)
Expenses must be substantiated
Expenses may not be for prior taxable year, incurred
before date the HRA began, or before employee
enrolled in HRA
HRA

Qualifications for exclusion


No person may have right to receive cash or any
benefit other than reimbursement of medical care
expenses.
If any person has such a right currently or in an
future year, all distributions to all persons under
HRA in current year are included in gross income
(even amounts paid to reimburse medical care
expenses).
HRA

Qualifications for exclusion

Arrangements formally outside HRA that provide
for adjustment of employee’s compensation will
be considered in determining eligibility for
exclusion.

If bonus at retirement is related to HRA balance or
severance is paid only to employees who have HRA
balance, then all reimbursements for all participants are
disqualified.
HRA

Qualifications for exclusion




Reimbursements can be to former employees and retirees
up to the unused balance.
Employer may reduce maximum balance after retirement or
termination for any administrative costs of continuing
coverage.
Employer may or may not provide an increase in amount
available after an employee retires or terminates
employment.
If HRA allows payment of medical benefits to designated
beneficiary other than the employee’s spouse or
dependents payments are not excludable from income –
effective 8/14/06 (delayed until 2009 for HRA provisions
created before 8/14/06)
HRA

HRAs and Cafeteria Plans

Employer contributions to an HRA may not be attributable
to salary reductions or provided under a section 125
cafeteria plan to be excluded from taxable income

Look at all circumstances in determination


If salary reduction election for coverage period exceeds the actual
cost of the accident or health plan coverage for that period, salary
reduction is attributable to HRA – Look to COBRA rates for this.
If correlation between maximum reimbursement amount available
and amount of salary reduction election for accident and health
plan then reduction is attributable to HRA
HRA

HRAs and Flexible Spending Accounts
(FSAs)


Amount credited to HRA must not be directly or
indirectly based on amount forfeited under FSA
If medical expenses are reimbursable under HRA
and FSA, HRA must be exhausted before FSA

Before FSA plan year begins, the plan document can
specify coverage under HRA is available only after
amount under FSA has been exhausted. In no case can
HRA and FSA reimburse the same medical care
expenses.
HRA

Nondiscrimination rules applicable to HRAs


Section 105(h) same as for self-insured medical
reimbursement plans
HRA is subject to COBRA



If individual elects COBRA continuation coverage HRA must
provide for continuation of maximum reimbursement with
increase at same time and same increment as similarly
situated non-COBRA beneficiaries
Plan can provide for continued reimbursement regardless of
election of continuation coverage (not mandatory)
No Reporting Requirement for HRA.
Health Savings Accounts (HSA)




Created by the Medicare Prescription Drug
Improvement and Modernization Act of 2003
Effective for Taxable years beginning after
12/31/03
Tax-exempt trust or custodial account created
exclusively to pay for qualified medical
expenses of the account holder (employee)
and his or her spouse and dependents.
Subject to rules similar to those for IRAs
HSA

Qualifications for exclusion


Individuals must be only in high deductible health plan
(HDHP)
Annual deductible for 2009 must be at least $1,150 for
individual coverage and $2,300 for family coverage with out
of pocket expense limits no more than $5,800 for individual
coverage and $11,600 for family coverage.


If family coverage, no amounts are payable from HDHP until
the family has incurred medical expenses in excess of
minimum annual deductible.
An HDHP can have a smaller deductible or none at all for
preventive care.
HSA

Qualifications for exclusion cont’d

The insurance can be a PPO or POS – in which
case the annual out-of-pocket limit is determined
by services within the network.
HSA

Contributions



Contributions can be made by the employer and
employee – All contributions are aggregated for
purposes of maximum contribution limit.
Contributions to Archer MSAs reduce the limit
available for HSA for tax exclusion
Any amount over the limit is includable in gross
income

There is a 6% excise tax for excess individual and
employer contributions in addition to all federal taxes.
HSA

Contributions

Maximum annual contribution is the lesser of


100% of annual deductible
Maximum deductible permitted same as Archer MSA


For 2009 maximum is $3,000 for an individual and $5,950
for a family
Catch up is allowed for individuals at least 55 years old
on the last day of the tax year.

For 2009 and beyond
$1,000
HSA

Contributions



No contributions can be made once the individual
is eligible or Medicare (65 years old).
Amounts can be rolled over from an Archer MSA
and IRA, or another HSA
Employer contributions must be the same for
everyone with comparable coverage either at the
same amount or percent of deductible

Comparability is applied separately to part-time
workers (normally less than 39 hours per week).
HSA

HSA and HDHP can be included in a
Cafeteria Plan

HSAs are not subject to COBRA continuation
coverage
HSA

Distributions

Excluded from gross income if for qualified
medical expenses of employee, spouse or
dependents.

If not used for qualified medical expenses then it is
included in gross income and subject to additional 10%
tax unless after death, disability, or the employee
reaches 65 years old.
HSA

Distributions

Qualified medical expenses

Generally health insurance premiums are not qualified
except:





Qualified long term care insurance
COBRA health care continuation coverage
Health insurance premiums while the individual is receiving
unemployment compensation benefits
Individual over 65 for Medicare premiums and employer
share of premium for employer provided health insurance
Cannot use HSA funds to pay premiums for Medigap
policies.
HSA

Distributions


Employers are not required to determine whether
HSA distributions are used for qualified medical
expenses. Employee makes determinations and
must maintain records to substantiate.
Employers can provide eligible individuals with
debit, credit or stored-value cards – same
guidance as under HRAs
HSA – Reporting Requirements

Employer contributions and salary reductions
contributions (pre-tax deductions)


Employer contributions over limits


Box 12W on W-2
Box 1,3, and 5 on W-2 with taxes in boxes 2, 4, and 6
Employee contributions not made by salary
reduction


Box 1, 3, and 5 on W-2
Employee can deduct up to the annual limit on personal tax
return
Sick Pay

Paid by employer from regular payroll account


Taxable as regular income
Separate plan (STD, LTD)



Premiums paid by employee on after tax basis – benefits
are not taxable
Premiums paid by employer or on pre-tax basis – benefits
are fully taxable.
Premiums paid by employer and employee (after-tax) –
portion of benefits attributable to employer-funded portion
is taxable.
Sick Pay

Responsibility for income withholding and
employment taxes

Employer pays and is self-insured


Employer withholds taxes based on employee’s most
recent W-4
Employer withholds and pays employer share of Social
Security, Medicare, and FUTA taxes for all payments
made within 6 calendar months after the end of the last
month during which the employee worked.

If employee returns to work, new six-month period begins if
employee is later on disability
Sick Pay

Responsibility for income withholding and
employment taxes

Payments made by employer’s agent – employer
is self insured.


Agent may withhold FIT at 25% in 2009
Employer retains responsibility for Social Security,
Medicare, and FUTA unless agreement with agent to
take on this responsibility.
Sick Pay

Responsibility for income withholding and
employment taxes

Payments are made by an insurance company
who receives premiums for disability coverage.



Third party not required to withhold FIT from payments
unless requested by disabled employee (W-4S)
IRS allows for fixed amount or percentage (W-4S has no
provision for percentage)
Third party withholds and remits Social Security and
Medicare taxes or advises employer who pays the taxes
and includes in 941.
Sick Pay

Permanent Disability benefits


Payments subject to income tax to extent
premiums were paid by employer or with pre-tax
dollars
Payments are not subject to Social Security,
Medicare, or FUTA
Workers’ Compensation Insurance

Form of insurance employers are required to
buy to insulate them from lawsuits brought by
employees who are hurt or become ill while
working.


Benefit payments – not included in gross income
or subject to any employment taxes
Premium payments – paid by employer based on
specific earnings and classifications.
Retirement and Deferred Compensation
Plans






Qualified Pension and Profit Sharing Plans
IRC 401(a)
Cash or Deferred Arrangements IRC 401(k)
Tax-Sheltered Annuities IRC 403(b)
Deferred Compensation Plans for Public
Sector and Tax-Exempt Groups IRC 457
Employee-Funded Plans IRC 501(c)(18)(D)
Individual Retirement Accounts (IRA)
Retirement and Deferred Compensation
Plans




Simplified Employee Pensions IRC 408(k)
Savings Incentive Match Plans for
Employees of Small Employers (SIMPLE
Plans)
Employee Stock Ownership Plans
Nonqualified Deferred Compensation Plans
Qualified Pension and Profit Sharing Plans
401 (a)

Defined Benefit Plans


Benefit to employee based on age, compensation
level and length of service
Defined Contribution Plans

Account for each employee, with set amount
being contributed. Employee’s retirement benefit
depends on the amount of money in the account
at retirement.
Qualified Pension and Profit Sharing Plans
401 (a)

Defined Contribution Plans


Money Purchase Pension Plan - Employer makes
contributions each year based on employee’s
compensation.
Profit Sharing Plan – Employer contributions are
substantial and recurring, although they may be
discretionary to some degree
Qualified Pension and Profit Sharing Plans
401 (a)

Annual Compensation and Contribution Limits




Set by Economic Growth and Tax Relief Reconciliation Act
of 2001 (EGTRRA)
For 2009 annual compensation limit is $245,000 (indexed
annually to the next lowest multiple of $5,000).
Annual contributions and other “additions” to defined
contribution plans is limited under IRC 415 to the lesser of
$49,000 in 2009 (indexed annually) or 100% of employee’s
annual compensation.
Pre-tax elective deferrals to 401(k), 403(b), 457, 125,
132(f)(4) are included in employee’s contribution to
determine the limit.
Qualified Pension and Profit Sharing Plans
401 (a)

Tax Treatment of Pension and Profit Sharing
Plans

Qualified Plan – meets certain requirements under
IRC 401(a) regarding participation, vesting,
contribution limits, benefit limits, and
nondiscrimination in favor of highly compensated
employees.


Employer contributions are excluded from wages and
are not subject to federal income tax withholding, or
Employment taxes.
Employee after-tax contributions are included in income
and taxable whether voluntary or required.
Qualified Pension and Profit Sharing Plans
401 (a)

State Tax Treatment of Pension Payments

1996 Law (HR394) prohibits states from imposing
income tax on the “retirement income” of nonresidents.
Cash or Deferred Arrangements (CODA)

Voluntary Salary Reduction Plan – 401(k)
 Pension Protection Act of 2006 put ability to automatically enroll
employees in 401(k) plan into the law for plan years starting after
12/31/07




Must provide specific schedule of automatic contribution. It must be
at least 3% at hire and may stay at that level until the beginning of
the second year after hire.
Increases must be at least 1% each year up to 6% for fourth. The
arrangement can specify larger percents up to 10% of compensation.
If employer matches contributions, the plan must provide 100%
match for first 1%; plus 50% for contributions between 2% and 6% or
non-elective contribution of at least 3% of compensation – cannot
contribute at high percent for highly compensated employees and
cannot match contributions over 6%.
When hired employees must have 90 days to withdraw from
automatic elections and recover contributions from the plan.
Employees can change or stop future contributions at any time.
CODA

Contribution Limits for 401(k)



Tax Treatment of 401(k) contributions



2009 contribution limit is $16,500
Adjusted for inflation in $500 increments for future years
Not taxable for Federal Income Tax (an most states)
Taxable for Employment Taxes
Reporting for 401(k) contributions on W-2



Not in box 1, but in boxes 3 & 5
In box 12 with a “D”
Retirement box is checked in there were any deductions
in the tax year.
CODA

“Catch-up” contribution began in 2002

Under EGTRRA – Applies to plans 401(k), 403(b),
SEP, Simple, and 457 plans


Employee must be at least 50 years old in the current
year
Limits of “catch-up” for all but SIMPLE



2009 catch-up limit is $5,500
Limit will be adjusted for inflation in $500 increments for
future years
SIMPLE “catch-up” limit is $2,500 in 2009. Limit will be
adjusted for inflation in $500 increments for future years.
CODA

Non Discrimination Testing

Must not discriminate in favor of highly compensated
employees





5% owner of stock or capital
Annual compensation over $110,000 (2009) or top paid 20%
of employees
Other Contributions can be included
“Catch-up” Contributions are not counted.
At least 70% of non-highly compensated employees must
be eligible or the % of non-highly compensated eligible
employees is at least 70% of the percentage of eligible
highly compensated employees.
CODA

Non Discrimination Testing

Other ways to meet non-discrimination testing


Employer matches 100% of elective deferrals for not
highly compensative employees up to 3% and 50% up
to 5%
Employer is required to contribute at least 3% of salary
for non highly compensated employees regardless of
the employee’s participation in 401(k)
CODA

Failure of ADP (Actual Deferral Percentage)
Test

Must distribute some elective deferrals and
earnings to highly compensated employees within
certain period and report on 1099-R
CODA

Holding period for 401k contributions


In 1996 the Labor Dept. shortened the maximum
holding period for 401(k) contributions from 90
days to the 15th business day of the month
following the month during which the amount
would have been paid to the employee.
Employers who cannot meet the deadline can
have an extra 10 business days, but must provide
reasons for the delay.
CODA

Early Distribution Penalty


If employee receives a distribution before retirement (with
exceptions) there is a 10% excise tax on the taxable
portion of the distribution.
Veterans can make deferrals for years spent in
military service



Extra deferrals can be made for up to three times the
period of military service (not to exceed 5 years)
Separate reporting requirements
Not included in non-discrimination tests.
Roth 401(k)

Starting in 2006 employers may permit
employees to designate some or all of the
contributions as Roth 401(k)



The contributions are made with after-tax dollars.
The earnings from the eventual distribution will be
tax exempt.
All 401(k) contributions (both pre-tax and Roth)
are taken into account for limits and antidiscrimination testing.
Roth 401(k)

Reporting of Roth 401(k) on W-2


The amount contributed in boxes 1, 3 & 5.
The amount contributed in box 12 with “AA”
Tax-Shelter Annuities 403(b)

Who can offer


Public Schools, Tax Exempt Charitable, Religious, and
Educational Organizations
Automatic salary reductions


Can qualify as elective deferrals
Newly hired employee, who does not make an election can
have automatic 4% deductions toward purchase of annuity.


At hire employee must receive notice of auto election and right
to elect to change the amount or opt out altogether.
Every year employee notified of reduction percentage and
their right to change it, including procedure and timing for
doing so.
403(b)

Requirements





Annuity contract may not be purchased through a qualified
annuity plan under Section 403(a)
Employee’s rights must be non-forfeitable unless employee
fails to pay premiums
Plan (other than church plan) must meet non-discrimination
requirements.
Plan must offer all employees the chance to defer at least
$200 annually if one employee is given the opportunity.
The elective deferral limits must be met if plan provides for
salary reduction agreement.
403(b)

Requirements and Taxability




Has many of the same requirements as 401(k)
Employer contributions (e.g. match) are not
included in wages or subject to withholding
Employee contributions are not Taxable for
Federal Income Tax and most state income taxes.
Employee contributions are Taxable for
employment taxes
403(b)

Reporting on W-2



Contributions not in box 1 but in boxes 3 & 5.
Contributions also show in box 12 with an “E”
Box 13 Retirement plan is checked if there are
any contributions for the tax year
Catch-up special rule

For employees with as least 15 years of service
with employer.
403(b)

Catch-up special rule

Amount of catch-up limited to the lesser of




$3,000 additional contribution in any year (same as
catch-up for those at least 50 years old)
$15,000 reduced by any amounts contributed under this
special provision in previous years.
$5,000 x years of service less total elective deferrals
from previous years.
If eligible for both special and over 50 catch-up cannot
go over $5,500 – first dollars considered under special
rule.
Deferred Compensation Plans for Public
Sector and Tax-Exempt Groups (IRC 457)

Who can Offer


Eligibility


Only individuals performing services for the employer are
eligible (including independent contractors)
Nondiscrimination Testing


State and local government employers and tax-exempt
organizations (other than churches)
457 plans can be discriminatory.
Deferral Limits

Same as 401(k)
IRC 457

Catch-up Contributions – new in 2002


Special rule near retirement


Same as 401(k)
For last 3 years before normal retirement,
maximum deferral is lesser of twice the normal
deferral or the current year limit plus the limits
from previous years, reduced by participant’s
deferrals for those years.
Cannot use both Catch-up and Special Rule
IRC 457

Rules

Funds and earnings in tax-exempt trust for
exclusive benefit of employees and beneficiaries


Funds must be transferred within 15 business days after
the month when would have been paid to employees.
Deferrals and earnings remain assets of the
employer subject to employer’s general creditors
IRC 457

Tax Treatment



Not subject to federal income tax withholding
Are subject to Social Security, Medicare, and FUTA as soon
as there is no substantial risk of forfeiture of right to the
benefit
Reporting


Not in Box 1 of W-2, but in Box 3 and 5 with Social Security
and Medicare taxes in Boxes 4 and 6 respectively and in
Box 12 preceded by Code “G.”
Employer should not mark check box in Box 13 “Retirement
plan” based on 457 deferrals
IRC 457

Distributions – Changes made by Economic Growth
and Tax Relief Reconciliation Act (EGTRRA) of 2001




No distributions before employee reaches age 70-1/2,
separation from employment (retirement) or the employee
faces an unforeseeable emergency.
Plan may allow early distribution if total amount payable is
no more than $5,000 and no amount has been deferred
within 2 years of the distribution.
Distributions are considered pension
Entity distributing has responsibility for withholding and
remitting income taxes
Individual Retirement Accounts (IRAs)


Employer sponsored IRA must be in writing
and created for exclusive benefit of
employees and beneficiaries.
Contribution Limits


2009
$5,000
After 2009 adjusted for inflation to next multiple of
$500
IRA

Catch-up Provision

Participant must be at least 50 by the end of the
year.

Can deduct an additional $1,000 in years 2009 and
beyond.
IRA

Tax Treatment

Contributions are deductible


Reduced if employee or spouse is an active participant
in a qualified retirement plan
Amount of reduction is based on adjusted gross income.



For 2009 the reduction begins for married employees filing
a joint return at $89,000; single $55,000; married filing
separately $00.
Employee not active participant (but spouse is) reduction
starts at $166,000 for 2009 (married filing joint return)
Taxability for deduction totally eliminated at $10,000
over the above limits ($20,000 for joint filers beginning in
2007).
Roth IRA

Contributions



Established by Taxpayer Relief Act of 1997
Contributions are Taxable –There are no phase-outs
because of active plan participant status, but the amount
allowed is reduced by an contributions by the individual to
other IRAs for that year
For 2009 the amount that can be contributed is phased out
once individual’s adjusted gross income exceed $166,000
for joint filers or $105,000 for single filers in 2008 (adjusted
annually for inflation). Contributions are completely phased
out at $176,000 for joint filers and $120,000 for single filers.
Roth IRA

Employers can allow direct deposit of
contributions






No contribution allowed by employer
Participation Voluntary
No endorsement by employer allowed
IRA sponsors publicize direct to employees
Contributions are remitted to IRA sponsor
Employer does not receive any kind or
consideration.
Roth IRA

Distributions

Distributions are not included in gross income


If made no sooner than 5 years after first contribution
and
Made on or after age 59-1/2, death, disability, or used
for a first time home purchase.
Employee Stock Ownership (ESOP)



Defined Contribution Plan
Stock bonus plan or combined stock bonus
and money plan designed to invest primarily
in the employer’s stock.
Same general requirements as IRC 401(a)
ESOP

Tax Treatment


Employer contributions are not wages and not
subject to federal income tax withholding, Social
Security, Medicare, or FUTA.
Limit

200p – lesser of $49,000 or 100% of compensation.
Nonqualified Deferred Compensation
Plans


Employer plan to defer compensation to a
later date, which may or may not coincide
with retirement.
Plan does not meet requirements of 401(a)


No limits
Can be discriminatory
Nonqualified Deferred Compensation
Plans

Tax Treatment



The majority of these plans are unfunded – employee has
only employer’s promise; the funds are not protected from
the employer’s creditors or successors.
When unfunded, the amounts are not subject to federal
income tax, but are subject to Social Security, Medicare,
and FUTA.
When distributions are made later, the deferrals and the
subsequent interest are subject to federal income tax, but
not Social Security, Medicare, or FUTA
Nonqualified Deferred Compensation
Plans

Requirements


Written plan
Employee has a legally binding right to
compensation that has not been actually or
constructively received and that is payable in a
later year.
Nonqualified Deferred Compensation
Plans

Reporting Requirements



Amounts deferred into unfunded plan are reported
in Box 3 and 5
Such deferrals are reported in Box 11, but only if
they are for prior year services.
Amounts distributed are reported in Box 1 only

The amounts should be reported in Box 11, if there were
no deferrals in the year of distribution.
Family and Medical Leave Act (FMLA)

Guarantees employees (in workplaces with
50 or more employees) unpaid leave in a 12month period for specific reasons.

Employer decides what constitutes a 12-month
period. If employer fails to make decision clear,
the 12-month period applied is the one most
favorable to the employee.
FMLA – Reasons for FMLA

12 weeks in a 12 month period




To be with a newborn or newly adopted child
To take care of a seriously ill child, spouse, or
parent.
To care for themselves if they are seriously ill.
Any qualifying exigency (i.e. need) arising out of
the fact that the employee’s spouse, son,
daughter, or parent is a covered military member
on active duty or has been notified of an
impending call to active duty in support of a
contingency operations.
FMLA – Reasons for FMLA

26 weeks in a “single12 month period”



To care for military service member with serious injury or
illness suffered in the line of duty if the employee is the
employee is spouse, son, daughter, parent, or next of kin of
covered service member.
If employee does not take full 26 weeks remainder is
forfeited.
No more than 26 weeks can be taken even if there is
another reason during the 12 month period beginning on
the first day the employee takes leave.
FMLA - Eligibility


Has been employed by employer for at least
12 months (not necessarily consecutively)
And has worked at least 1,250 hours within
the previous 12-month period.

Exempt employees who have been employed one
year are deemed to meet the hours worked
requirement unless employer can prove otherwise
(A part time exempt employee scheduled to work
less than 24 hours per week).
FMLA – Paid vs. Unpaid Leave

Employers can require eligible employees to
use any paid leave as part of guaranteed
leave.

Employer must designate time off as paid or
unpaid FMLA within 2 business days of receiving
notice.
FMLA – Notice Requirement

Employee must give employer 30 days notice


If not foreseeable – whatever notice is possible
under the circumstances.
If foreseeable and not notified, employer can deny
leave request for up to 30 days after notice is
provided.
FMLA – Notice Requirement

Employer must advise eligibility within 5 days of notice or when
employer becomes aware that employee may qualify for FMLA
 If employee is not eligible the employer must give at least one
reason for the denial
 Employer must provide separate notice as the same time of
FMLA rights including






How 12 month period was determined
Certification Requirements
Requirement to take paid leave
Premium payment requirements for health benefits
Job Restoration rights including effect of “key employee” designation
Potential liability for health insurance premiums if employee does not
return to work
FMLA – Job Guarantee

Upon return employee is entitled to previous
job or “equivalent” with no loss of pay or
benefits.



Employee is not entitled to accrue any benefits or
seniority during an unpaid FMLA leave
Any benefit increases or improvements not
dependent on seniority must be made effective
upon return
FMLA time must be treated as continuous service
under pension and retirement plans for vesting
and qualification purposes.
Intermittent FMLA


Several Days
Working reduced hours

If reduced hours, employer can deduct from
exempt employee’s salary without converting
employee to non-exempt under FLSA
FMLA – Loophole and Recordkeeping

Coverage Loophole


The law requires employers to allow leave if there
are 50 employees employed by the employer
within 75 miles of the employee’s worksite when
leave is requested.
Recordkeeping requirements

Basic payroll records regarding hours worked,
rate of pay, deductions, details of dates and
amounts of FMLA leave taken; copies of notices
and documents related to FMLA leave.
FMLA/Health Insurance

FMLA guarantees continuation of employee’s
health benefits while on leave.

Employer can require employee’s premiums

Can be paid before, during or upon return




Pre-paid cannot be only option
Catch-up can be sole option only if it is the only option
offered to employees on unpaid non-FMLA leave.
If during leave, payments are missed, the employee can
be dropped after 30 days.
Notice must be provided to employee and 15 days
allowed before coverage is dropped.
FMLA/Medical Flexible Spending
Offered under Cafeteria Plan

Employees must be allowed to:



Continue coverage including health FSA while on
FMLA leave
Revoke coverage or to continue coverage but
discontinue paying premiums during the leave.
Reinstate health FSA coverage upon returning to
work from unpaid FMLA leave

Employer can require reinstatement if required of
employees on unpaid non-FMLA leave.
FMLA/COBRA

Qualifying event is deemed to occur on the
last day of FMLA leave if employee
terminates employment at the end of FMLA
leave.

Maximum continuation coverage period is
measured from that date or the date coverage is
lost whichever is later.
FMLA – Key Employees


Employer may deny reinstatement to “key
employees” if necessary to prevent “substantial and
grievous” economic injury to the employer’s
operations.
Key Employee


Salaried person among the highest 10% of all employees
within 75 miles of the employee’s worksite.
Employee must be informed of possibility upon request and
must be notified in writing (in person or certified mail) as
soon as the determination is made within 5 days of request
for leave.
Cafeteria Plans

Specific type of flexible benefit plan
authorized by Section 125 of the Internal
Revenue Code


Must contain at least one Taxable (cash) and one
Non-Taxable (qualified) benefit.
Participation must be restricted to employees and
must be maintained for their benefit.
Cafeteria Plans

Examples of Qualified Benefits




Accident and health insurance plans
Dependent care assistance
Group-term life insurance
Qualified adoption assistance
Cafeteria Plans

Funding



Flex Dollars or Flex Credits
Salary Reduction
Prohibition – Deferred Compensation


Carry over unused contributions or benefits from
one plan year to another.
Use contributions from one plan year to purchase
benefits employer will provide in later plan year.
Cafeteria Plan Requirements

Written Permanent Plan






Description of benefits and period of coverage
Plan’s rules for eligibility
Procedures for elections
Manner in which contributions are made
Maximum amount of employer contributions
available to any participant
Definition of plan year
Cafeteria Plans – Qualifying Event

Change in status that allows employee to
revoke or change an election during plan
year






Marital status
Change in number of dependents
Employment status change – employee or spouse
Change in dependent status
Residence change – employee, spouse or
dependent
Adoption
Cafeteria Plans – Qualifying Event

Cost-driven change that allows change in
election during plan year




Cost of qualified benefits increases or decreases
New benefit option
Dependent Care - cost change imposed by nonrelative care provider
Spouse change – different enrollment period or
change in cost of benefits available to spouse
Cafeteria Plans – Changes to 401(k)
Elections

Cafeteria plan may permit an employee to
change or revoke election deferrals to 401(k)
plans or employee contributions governed by
401(m). The election revocation restrictions
of Section 125 to not apply to these plans.
Cafeteria Plans – Non-Discrimination
Testing

Non-discrimination Testing

Plan must not discriminate in terms of eligibility,
contributions, or benefits in favor of highly
compensated individuals, participants, or key
employees.
Cafeteria Plans – Non-Discrimination
Testing

Non-discrimination Testing

Eligibility



Eligibility must not exceed 3 years
Length of service requirement must be the same for all
employees
Contributions and benefits test


Each participant must have an equal opportunity to
select non-taxable benefits
Highly compensated participants must not
disproportionately select non-taxable benefits.
Tax Treatment of Cafeteria Plans



Employer contributions or pre-tax
contributions are not subject to federal
withholding or employment taxes to the
extent that they are used to purchase nontaxable benefits.
After-tax contributions toward benefits are
fully taxable – the benefits purchased are
excluded from employee’s income.
Cash – if employee chooses cash, it is fully
taxable.
Tax Treatment of Cafeteria Plans

Discriminatory plans


No negative tax consequences to non-key
employees
Key employees have taxable income equal to the
highest amount of taxable benefits they could
have selected.
Flexible Spending Arrangements (FSAs)


Can be offered as part of a cafeteria plan
Coverage requirements


Specified expenses incurred by employees
subject to maximums and other reasonable
conditions.
Maximum reimbursement amounts cannot be
more than five times the total premium for
employee’s coverage (life, health, dental, vision).
Health Care FSA


Elections must be made before year begins
Cannot allow compensation to be deferred beyond
the plan year or used for another benefit.


Excess premiums in health FSA that exceed all
reimbursements of claims and administrative costs can be
used to reduce employees’ required premiums as a
dividend or premium refund. Must be allocated on uniform
basis.
Starting in 2006 employers can allow a 2-1/2 month
grace period for employees to spend money in their
FSA – this will affect employees ability to elect HSA
Health Care FSA

Maximum amount of reimbursement selected
by participant must be available at all times
during the plan year.


Amount available is reduced by reimbursement
claims
The premium payment schedule cannot be
accelerated because of claims or employee
separation from employment.
Health Care FSA

Reimbursements



Medical FSAs can only reimburse medical
expenses incurred during coverage period –
cannot reimburse premiums
Medical expenses must be substantiated by third
party and a statement from employee that the
expense is not reimbursable under any other
coverage is required.
Reimbursements can only be made for expenses
actually incurred during period of coverage –
when medical care if provided.
Dependent Care FSA



Not subject to uniform coverage rule –
reimbursements are only made up to the
amount already deducted.
Employees can be reimbursed up to $5,000
of dependent care expenses.
Employees must reduce any dependent care
tax credit they receive dollar for dollar by any
amounts contributed to Dependent FSA

Amount deducted for Dependent FSA goes in Box
10 on the W-2
State Taxation


Starting on page 4-126 – table of State
Taxability
Illinois


Deferrals under Section 125 or 401 are not
taxable for state income tax, though they are
taxable for SUI
Deductions used to purchase medical or life
insurance are not taxable for state income tax or
SUI.