Nancy E. Parkinson, CPP
Health, Accident & Retirement
Content coverage:
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Health Insurance
Traditional Health Insurance Plans
 Health Maintenance Organizations (HMOs)
 Preferred Provider Organizations (PPOs)
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Sick Pay
STD
 LTD
 3rd Party Sick Pay
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Worker’s Compensation Insurance
• FMLA
• Retirement and Deferred Compensation Plans
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Health & Accident Insurance Contribution- Tax
Non-Taxable Contributions Treatment
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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 status will
continue to apply to a person who is receiving more than
½ his/her support from the taxpayer even if their earnings
more than the annual exemption.
• Coverage for “adult children” (under age 27 by end of
taxable year) – married or unmarried. Plan cannot define
“dependent” for purposes of eligibility other than
relationship between child & participant. No coverage for
grandchildren allowed
Health & Accident Insurance Contribution- Tax
Treatment Cont.
− Domestic/Life Partners
• 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.
Health & Accident Insurance Contribution- Tax
Treatment Cont.
− Change in definition of “Medical Expenses”
• Applies for purposes of direct reimbursement of employee
expenses or indirect reimbursements through FSAs, HRAs,
and Archer MSAs.
° Only costs of medicines prescribed by a doctor and
insulin are eligible. Change only affects over-thecounter medicines unless doctor prescribes with a
written prescription – for tax years beginning 2011
Health & Accident Insurance Contribution- Tax
Treatment Cont.
Taxes Involved
− Federal Income Tax
• Employment Taxes
◦ Social Security
◦ Medicare
◦ FUTA
Exclusion from Social Security , Medicare & FUTA must:
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
Health & Accident Insurance Contribution- Tax
Treatment Cont.
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Employer-paid physical exams – NOT excluded from income
as a working condition fringe benefit, but IS excluded from
income as an employer-paid medical care expense
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).
Health Insurance – Nondiscrimination Requirements
Patient Protection and Affordable Care Act – effective for plan years
beginning on or after September 23, 2010
− If insurance is provided through third party insurance
company there is no nondiscrimination 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)
Non Discriminatory Plan
Self-insured plan must benefit:
• At least 70% of all employees
• At least 80% of employees eligible to participate in
the plan (IF at least 70% of all employees are eligible
to participate)
• A classification of employees that the Secretary of
the Treasury finds not to be discriminatory
• If all benefits provided to highly compensated
employees are provided for all other participating
employees
Discriminatory Plan
Amounts paid to highly compensated employees must be
included in taxable income
Highly Compensated employees:
• 5 highest-paid officers
• Owner of more than 10% of employer’s stock
• Top-paid 25% of employees
Although discriminatory reimbursements are taxable to
the highly compensated employees receiving them, they
are not subject to federal income tax withholding or
employment taxes.
W-2 Reporting of employer-sponsored health coverage
Patient Protection and Affordable Care Act
• Requires employers to report the total cost of employersponsored health coverage on employees Forms W-2. Applies
to Forms W-2 for 2012 for first time.
• For informational purposes only
◦ To inform employees of the cost of their health care
coverage
◦ Does NOT cause excludable employer-sponsored health
care coverage to become taxable
◦ Aggregate reportable employer cost reported on W-2 in
box 12, code DD
◦ No reporting on Form W-3
• Reporting exceptions for 2012 W-2’s:
◦ If employer filed less than 250 W-2’s for preceding
calendar year
◦ If employee terms and requests a W-2 before end of
calendar year
W-2 Reporting of employer-sponsored health coverage
Definitions to know (pages 4-12 thru 4-18)
• Aggregate Cost – total cost of coverage under all applicable
employer-sponsored coverage provided to employee
• Applicable employer-sponsored coverage – coverage under
any group health plan made available to employee by
employer that is excludable from employee’s gross income –
see exceptions (p. 4-12 & 4-13)
• Group health plans – A plan of, or contributed to by, an
employer or employee organization to provide health care to
employees, former employees, the employer, others associated
or formerly associated with the employer in a business
relationship, or their families
• Aggregate reportable cost – Includes both the portion of the
cost paid by the employer and the portion of the cost paid by
the employee, regardless of pre-tax or after-tax contributions
W-2 Reporting of employer-sponsored health coverage
Definitions to know (continued)
• Not included in the aggregate reportable cost –
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Archer medical savings account
Health savings account
Multiemployer plan (IE: amounts contributed to a union plan)
Health reimbursement arrangement
Health flexible spending arrangement
Dental or vision plan (if plan is offered under a separate policy,
certificate, or contract of insurance)
Cost of coverage under hospital indemnity or other fixed indemnity
insurance (UNLESS employee purchases policy on a pre-tax basis
under a Section 125 plan OR employer makes any contribution to
the cost of coverage that is excludable
Self-insured plan not subject to COBRA
Plan primarily for the military
Excess reimbursements
Coverage provided under an EAP, wellness program, or on-site
medical clinic
W-2 Reporting of employer-sponsored health coverage
Definitions to know (continued)
• Methods of calculating the cost of coverage –
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COBRA applicable premium method
Premium charged method
Modified COBRA premium method
Composite rate
Employer provides some benefits that are employer-sponsored
coverage and others that are not
Cost changes during the year
Employee begins, changes, or terminates coverage during the year
Adjustments for events after end of calendar year
Coverage period that includes December 31st and continues into the
subsequent calendar year
Transition relief
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 2012 annual deductible
• $2,100 – $3,150 for individual
• $4,200 - $6,300 for family
Maximum out-of-pocket expenses can be no more than
• $4,200 for individual coverage
• $7,650 for family coverage
Cannot be part of Cafeteria Plan
Medical Savings Accounts (Archer MSA) Cont.
Contributions can be made by employer or employee (not both)
Employee contributions are deductible from income on
personal tax return.
Subject to federal income tax withholding and
employment taxes.
Employer contributions are excludable from income.
MSA Contribution Limitations
Employee deduction cannot exceed employee’s compensation
Deduction or Contribution is limited to:
• 65% of the plan deductible for individual coverage
• 75% of the plan deductible for family coverage.
− Employer contributions must be the same amount for each
employee - either dollar amount or percentage of applicable
deductible
− Employer contributions in excess are included in income.
Medical Savings Accounts (Archer MSA) Cont.
− Cannot be part of a Cafeteria Plan
− Distributions from MSAs are excluded from income if they
are for medical expenses incurred by employee or his/her
dependents
• Covered medical expenses don’t include premiums for
insurance (other than long-term care), for health care
under COBRA, or for health care coverage while
receiving unemployment insurance benefits
• Person for whom expenses are incurred must be covered
only by high deductible health plan
• Distributions of earnings included in income are
◦ subject to an additional 20% 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
Medical Savings Accounts (Archer MSA) Cont.
Reporting Requirements:
Employer Contributions
• Box 12 R on W-2, code R
• Plan trustees report on 5498-SA
• Reported on employee’s personal tax return
Employee Deductions
• Box 1, 3 and 5 on W-2
• Employee takes deduction on personal income tax
return for amount contributed
• Plan trustees report on 5498-SA
Distributions
• Plan trustees report on 1099-SA
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 $310/day in 2012
(indexed for inflation)
◦ Excess will be excluded to the extent of actual cost of
care
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
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
Consolidated Omnibus Budget Reconciliation Act of
1985 (COBRA) Cont.
Qualifying Events:
• 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
− If another qualifying event during 29 months (other than
employer bankruptcy) coverage extends to 36 months
• Employer filed bankruptcy – life of retiree or retiree’s spouse
Consolidated Omnibus Budget Reconciliation Act of
1985 (COBRA) Cont.
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
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
Consolidated Omnibus Budget Reconciliation Act of
1985 (COBRA) Cont.
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 within 90 days of 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
Consolidated Omnibus Budget Reconciliation Act of
1985 (COBRA) Cont.
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
Consolidated Omnibus Budget Reconciliation Act of
1985 (COBRA) Cont.
FMLA/COBRA Interaction
• Date employee is to return to work at end of FMLA Leave
(or date employee notifies employer he/she is not returning
if before end of FMLA Leave) is qualifying date
◦ Unpaid required premium while on FMLA Leave does
not eliminate the employees right to COBRA
continuation coverage
American Recovery and Reinvestment Act of 2009
(AARA)
Discounted COBRA Premiums & Subsidies
• American Recovery and Reinvestment Act of 2009 (AARA) –
provides employees who have involuntarily lost their job
chance to pay for continued health insurance at a deep discount.
“Assistance eligible individuals” pay 35% of COBRA
continuation coverage premium
◦ Assistance Eligible Individual defined as an employee who
has involuntarily lost his/her job
◦ The qualifying event must have occurred between Sept 1,
2008 and May 31, 2010
◦ Termination has to be involuntary and no caused by
employee’s gross misconduct
◦ Individual can be “assistance eligible” more than once!
◦ Discounted premium is calculated on the amount employee
would normally be required to pay for COBRA coverage
American Recovery and Reinvestment Act of 2009
(AARA) Cont.
• Assistance for the subsidy ends with first month beginning on
or after the earlier of:
◦ 15 months after 1st day of 1st month of eligibility
◦ End of maximum required period of COBRA continuation
coverage
◦ Date the individual becomes eligible for Medicare benefits
or health coverage under another group health plan (after
end of any applicable waiting period)
◦ Subsidy may be available beyond August 31, 2011
• Employee must notify plan upon eligibility for other coverage
• Individual can appeal denial of subsidy
American Recovery and Reinvestment Act of 2009
(AARA) Cont.
• Regular COBRA continuation notice must now also include:
◦ Description of beneficiary’s right to premium reduction
◦ Forms necessary to establish eligibility & apply for
premium reduction
◦ Contact information for group health plan administrator
◦ Description of extended election period for individuals
who had COBRA continuation coverage in effect on Feb
17, 2009
◦ If available, option to enroll in different coverage than
what beneficiary was covered by (prior to the qualifying
event)
◦ Beneficiary’s obligation to notify plan of eligibility under
another group health plan or Medicare and subsequent
penalties for not providing such information
• Employer can face penalties for not providing notices to
eligible individuals
American Recovery and Reinvestment Act of 2009
(AARA) Cont.
• Extension of eligibility period to February 28, 2010 and 9 months
COBRA subsidy period extended to 15 months – Dept of Defense
Appropriations Act, 2010, Temporary Extension Act of 2010 and
Continuing Extension Act of 2010
• Employer can allow an assistance eligible individual to change
coverage options. If allowed:
◦ Premium must be no more than than premium paid by
individual for coverage prior to termination of employment
◦ Different coverage must also be offered to employers’ active
employees
◦ Coverage requirements:
− Must include health care coverage
− Cannot be a flexible spending arrangement
− Cannot be for treatment at an on-site medical facility
maintained by employer that consists primarily of first-aid
services, prevention & wellness care, or similar care
American Recovery and Reinvestment Act of 2009
(AARA) Cont.
• High earners may have to pay back subsidy as tax payment
(if modified AGI exceeds $145,000 ($290,000 for joint filers) –
employer does not make this determination but is made
when filing Form 1040
◦ High earners can “opt out” of the COBRA subsidy
• Employer is usually responsible for subsidizing COBRA
discount and claiming reimbursement of that amount
against its payroll taxes on Form 941
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 and adult children until the
year they reach age 27).
• Reimbursements up to maximum dollar amount (unused
portion carried forward to subsequent coverage periods).
• Unused portion cannot be paid to employee at end of year
(or at termination)
• Reimbursements can be paid with debit and credit cards –
substantiation procedures exist and must be met
Health Reimbursement Arrangements (HRA) Cont’d
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
• If amount credited to a reimbursement arrangement is
directly or indirectly based on amount forfeited under a Sect
125 flex plan, arrangement is treated as funded by salary
reduction
Health Reimbursement Arrangements (HRA) Cont’d
Qualifications for exclusion
• No 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).
• Arrangements 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.
Health Reimbursement Arrangements (HRA) Cont’d
Qualifications for exclusion (Cont)
• 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)
Health Reimbursement Arrangements (HRA) Cont’d
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 exists between maximum reimbursement
amount available and amount of salary reduction election
for accident and health plan then reduction is attributable
to HRA
Health Reimbursement Arrangements (HRA) Cont’d
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
• In no case can HRA and FSA reimburse the same medical care
expenses.
Health Reimbursement Arrangements (HRA) Cont’d
Nondiscrimination rules applicable to HRAs
Section 105(h) same as for self-insured medical reimbursement plans
HRA is subject to COBRA
• HRA must provide for continuation of maximum
reimbursement with increase(s) 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)
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
Health Savings Accounts (HSA ) Cont’d
Qualifications for exclusion
Individuals must be only in high deductible health plan (HDHP)
• Annual deductible for 2012
◦ at least $1,200 for individual coverage
• out of pocket expense limits no more than $6,050
◦ $2,400 for family coverage
• out of pocket no more than $12,100 for family coverage.
• no amounts payable for medical expenses until family
has incurred annual covered medical expenses in excess
of minimum annual deductible
• An HDHP can have a smaller deductible or none at all for
preventive care.
Health Savings Accounts (HSA ) Cont’d
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
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
Health Savings Accounts (HSA ) Cont’d
Contributions (cont’d)
Maximum annual contribution is the lesser of
• 100% of annual deductible or
• Maximum deductible permitted same as Archer MSA
For 2012 maximum is
• $3,100 for an individual
• $6,250 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
Health Savings Accounts (HSA ) Cont’d
Contributions (cont’d)
• No contributions can be made once the individual is eligible for
Medicare (65 years old).
• Amounts can be rolled over from an Archer MSA and IRA
another HAS
◦ 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 30 hours per week).
• Employers can make a one-time transfer of balance in employee’s
HRA or FSA to an HSA. Maximum amount is lesser of HSA
or FSA balance on date of transfer OR September 21, 2006.
Transfer must be completed by January 1, 2012.
Health Savings Accounts (HSA ) Cont’d
Contributions (cont’d)
• Transfer from an IRA is permitted as a one-time contribution to an
HSA – up to maximum deductible contribution limit at the
time of the contribution
• Transfers from an HRA, FSA, or IRA are treated as rollover
contributions and are non taxable
◦ EXCEPTION: If employee is not an eligible individual
with coverage under an HDHP at any time during the
prior 12 months beginning with the month of the HSA
distribution; if employee cannot meet the requirements,
distribution is included in gross income and employee is
subject to additional tax equal to 10% of distribution
unless reason for ineligibility is employee’s death or
disability)
• Transfer provision not applicable to SEP’s or SIMPLE retirement
accounts
Health Savings Accounts (HSA ) Cont’d
• HSA and HDHP can be included in a Cafeteria Plan
• HSAs are not subject to COBRA continuation coverage
• Employer can make larger contributions to non-highly
compensated employees’ HSA’s beginning in 2007
Calculating Comparable Contributions
• Sect 4980G mandates use of calendar year for comparability
testing purposes
• Several ways to comply with testing requirements:
◦ Pay-as-you-go basis
◦ Look-back basis
◦ Pre-funded basis
• Impermissible Contribution Methods do exist!
Health Savings Accounts (HSA ) Cont’d
Penalty for not making comparable contributions to all employees’
HSA’s is an excise tax equal to 35% of all amounts employer
contributed during the calendar year
Distributions
• Excluded from gross income if for qualified medical expenses
of employee, spouse or dependents not covered by other
insurance
• If not used for qualified medical expenses included in gross
income
• subject to additional 10% tax unless
◦ after death,
◦ disability,
◦ or the employee reaches 65 years old.
Health Savings Accounts (HSA ) Cont’d
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.
Health Savings Accounts (HSA ) Cont’d
• 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
Health Savings Accounts (HSA ) Cont’d
In 2004, IRS issued guidance clarifying how FSAs and HRAs interact
with HSAs
• Employee covered under DHDP and a health FSA or HRA
that pays or reimburses medical expenses, not eligible to
make contributions to an HSA
◦ CAN make contributions to an HSA for period of time
employee is covered under certain specified types of
employer-provided plans that reimburse employee
medical expenses
• Limited purpose health FSA or HRA
• Suspended HRA
• Post-deductible health FSA or HRA
• Retirement HRA
Health Savings Accounts (HSA ) Cont’d
Effect of FSA grace period on HSA eligibility
In 2005, IRS issued guidelines clarifying an employee participating in
an FSA and covered by a grace period (for incurring medical
expenses after the end of the plan year) is not eligible to contribute to
an HSA until after the FIRST DAY of the FIRST MONTH following
the end of the grace period.
Employer could adopt one of two options which will affect
employees’ HSA eligibility during the cafeteria plan period
• General purpose health FSA during grace period
• Mandatory conversion from health FSA to HSA compatible
health FSA for all participants
Health Savings Accounts (HSA ) Cont’d
W2 Reporting Requirements
Employer contributions and salary reductions contributions (pre-tax
deductions)
Box 12 with Code “W” on W-2
Employer contributions over limits
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
Family Medical Leave Act (FMLA)
Allows employees to take up to 12 weeks of unpaid leave in any 12
month period
• Newborn or newly adopted child
• Take care of seriously ill child, spouse, or parent
• Care for themselves if they are seriously ill
• Employee’s spouse, child 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 operation (can
take up to 26 wks in a 12 month period to care for covered
military service member with a serious injury or illness)
• Guarantees continuation of employees’ health benefits while on
leave
Family Medical Leave Act (FMLA) Cont ‘d
• Applies to private sector employers and public sector employees
with 50 or more employees (including part-time and employees
on leave or suspension, but not laid-off employees
• For public sector (government) employees and public elementary
and secondary schools – no limit on employees or distance
between locations
• Employee must have been employed by employer for at least 12
months and have worked at least 1,250 hours within the previous
12-month period
◦ the 12 months of employment need not be consecutive
◦ Employment prior to a continuous break in service of 7 years
or more does not need to be counted, unless:
• For fulfillment of National Guard or Reserve
• Period of approved absence or unpaid leave
Family Medical Leave Act (FMLA) Cont ‘d
• Expatriates are not covered
• Employer decides what constitutes a 12 mo period – must be
consistent; if employer policy is not clear, what favors employee
• CA & NJ require FMLA
• Employer can require employee to take leave
• “Serious Health Condition” defined in FMLA regulations
• Intermittent leave
◦ Can be several days or weeks at a time or by working
reduced hours
◦ Reduced hours can be deducted from an exempt employee’s
salary without jeopardizing exempt status
◦ If employee would be required to work overtime if not for
FMLA leave, hours employee would have been required to
work may be counted against FMLA entitlement
Family Medical Leave Act (FMLA) Cont ‘d
Designation as paid or unpaid leave
• Employer an require employee to use paid leave available to
the employee
• Employer must designate leave as paid or unpaid FMLA
leave within 5 days of receiving notice from employee a leave
will be taken.
◦ Notice must be in writing.
◦ Must inform employee of number of hours, days, or
weeks that will be counted against the employee’s FMLA
leave entitlement
• Employer must notify employee of eligibility to take FMLA
leave within 5 business days after either employee requests
leave or employer learns employee’s leave may be for an
FMLA qualifying reason. If employee is not eligible for
FMLA, notice must indicate at least one reason why
employee is not eligible or has no FMLA leave available.
Family Medical Leave Act (FMLA) Cont ‘d
• Regulations provide for a notice of FMLA rights and
responsibilities of the employer separate from the eligibility
notice. Notice must include the following information:
◦ FMLA leave designations
◦ How 12 mo period and “single 12-mo period” are
determined
◦ Employee certification requirements
◦ Substitution of paid leave for unpaid leave
◦ Premium payment requirements to maintain health benefits
◦ Job restoration rights, including effect of a “key employee”
designation
◦ Potential liability for health insurance premiums if employee
does not return to work
Family Medical Leave Act (FMLA) Cont ‘d
• Consequences exist for employer’s failure to follow FMLA
notice requirements
• There is a notice requirement for employees
◦ If medical treatment is foreseeable, a 30 day notice (or as
much as can be given under the circumstances)
• Medical or military certification can be required by employer
• Health insurance benefits employee enjoyed before the leave
must be continued during FMLA leave on the same basis
◦ Employer can require any employee premiums
◦ If employee fails to pay, employee can lose coverage after 30
days, but coverage must be restored when employee returns
to work without employee having to meet any additional
qualifications for coverage
Family Medical Leave Act (FMLA) Cont ‘d
• Job guarantee upon return from leave – either previous job or
one that is “equivalent” with no loss of pay or benefits
◦ Employer may deny reinstatement to “key employees” if it’s
necessary to prevent “substantial and grievous” economic
injury to the employer’s operations
• Key employee = paid on a salary basis; among the
highest paid 10% of all employees within 75 miles of
employee’s worksite when FMLA leave was requested
• Recordkeeping Requirements
◦ Basic payroll records – hours worked, rate of pay,
deductions from wages
◦ Records detailing dates and amount of FMLA leave taken
◦ Copies of notices and documents related to FMLA leave
Family Medical Leave Act (FMLA) Cont ‘d
• Enforcement administered and enforced by Department of
Labor’s Wage & Hour Division
• Retaliation for exercise of FMLA rights is prohibited by law
• Employers covered by both FMLA and state law must comply
with the law that provides the greatest benefits and protection
to the employee requesting leave
• Interaction of FMLA and cafeteria plans
◦ Employee is responsible for their share of premiums of
group health plan during leave
◦ Cafeteria plan may offer one or more of the following 3
payment options
• Pre-Pay
• Pay-As-You-Go
• Catch-up
Sick Pay
Sick Leave Pay
• Paid by employer from regular payroll account
Taxable as regular income
• Worker’s Compensation is different!
Sick Leave Pay under a 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 Cont ‘d
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 Cont ‘d
Responsibility for income withholding and employment taxes
• Payments made by employer’s agent OR employer is self
insured.
◦ Agent may withhold FIT at 25% in 2010
◦ Employer retains responsibility for Social Security,
Medicare, and FUTA unless agreement with agent to
take on this responsibility.
• Payments are made by an insurance company (3rd party) 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 Cont ‘d
Reporting Responsibilities
• Employer makes payments
◦ Report taxable amounts on Form 941
◦ Report income tax withheld on Form 941
◦ Report taxable amounts to employee on Form W-2
◦ Report payments on Form 940
• Employer’s agent makes payments
◦ Usually employer retains reporting responsibilities
• Third-party insurer makes payments
◦ Both the employer and the 3rd party have reporting
responsibilities; if 3rd party does not properly transfer
liability to employer, 3rd party is required to report on
Form 941, Form W2, and Form 940
Sick Pay Cont ‘d
Permanent Disability benefits
• Payments subject to income tax when premiums were paid
◦ by employer or
◦ with pre-tax dollars
• Payments are not subject to Social Security, Medicare, or
FUTA
◦ On or after employment relationship has terminated
because of death or disability retirement
◦ Employee receiving disability insurance benefits under
the Social Security Act – still subject to 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
Each state has its own Workers Compensation Insurance law. There
are 4 categories:
• National Council States (38 states plus District of Columbia)
• Non-National Council States (7 states)
• Monopolistic States (5 states)
• Competitive State Funds (12 National Council States)
Workers Compensation Insurance Cont’d
• Employers are assigned Classification Codes based on the type of
business
◦ There are classification code exceptions for employees who
work exclusively in an office, outside salespeople, and drivers &
their helpers
◦ Certain types of compensation can be excluded when
determining total payroll figure
• The “half” portion of overtime premium
• Reimbursed travel expenses
• Third-party sick pay
• Reimbursed moving expenses
• Tips
• Personal use of company-provided vehicle
• Group Term Life Insurance over $50,000.
• Severance Pay
• Education Assistance Payments
• Employer contributions to pension or insurance plans
Cafeteria Plans
Cafeteria Plans provide employees a choice from a “menu” of cash
compensation and nontaxable benefits authorized by Section 125 of
the Internal Revenue Code
A qualified Cafeteria Plan must contain at least one taxable (cash)
and one nontaxable (qualified) benefit
Examples of qualified benefits:
• Coverage under accident & health insurance plans
• Coverage under dependent care assistance plans
• Group Term Life insurance on lives of employees
• Qualified adoption assistance
• Premiums for COBRA continuation coverage
• Accidental death & dismemberment insurance
• Long-term and short-term disability coverage
• A 401(k) plan
• Contributions to HSA
Cafeteria Plans Cont’d
Exceptions to qualified non-taxable benefits would be:
• Scholarships and fellowships
• Nontaxable fringe benefits under IRC Section 132
• Educational Assistance
• Meals and lodging furnished for the benefit of the employer
• Employer contributions to Archer MSAs
• Long-term care insurance (unless purchased with funds from
a HSA offered as a qualified benefit)
• Group-term life insurance on the life of anyone other than an
employee
• Health Reimbursement Arrangements that allow any unused
amount to be carried over to the next coverage period to
increase the maximum reimbursement amount
• Elective deferrals to a Section 403(b) plan
Cafeteria Plans Cont’d
Reasons a plan would fail to satisfy Section 125 requirements:
• Offering nonqualified benefits
• Not offering an election between at least one permitted
taxable benefit and at least one qualified benefit
• Deferring compensation
• Failing to comply with the uniform coverage rule or use-orlose rule
• Allowing employees to revoke elections or make new
elections during a plan year (except as allowed by law)
• Failing to comply with substantiation requirements
• Paying or reimbursing expenses incurred for qualified
benefits before the effective date of the cafeteria plan or
before a period of coverage
• Allocating experience gains other than expressly allowed by
law
• Failing to comply with grace period rules
Cafeteria Plans Cont’d
• Premium-only plan – known as POP’s or premium conversion
plans. Used by employers who require their employees to
contribute towards benefits (usually health insurance)
• Deferred Compensation is prohibited under the rules governing
cafeteria plans
EXCEPTIONS
◦ 401(k)
◦ Educational institution contributions for postretirement
group-term life insurance
◦ Amounts remaining in a HSA at end of calendar year
◦ Benefits under a long-term disability policy relating to
more than one year
◦ Mandatory two-year election for vision or dental
◦ Using salary reduction amounts to pay premiums for the
1st month of the next plan year
◦ Purchase of additional time off carried over to next year
Cafeteria Plans Cont’d
Cafeteria plans are usually funded by either or both of the following:
• “Flex dollars” or “flex credits”
• Salary reduction – pre-tax contributions by the employee
result in a higher take-home pay for the employee
Automatic deferrals (i.e., “negative elections”) are OK
After-tax employee contributions also are part of a cafeteria plan
A Cafeteria Plan must have a written document laying out the
particulars of the plan and it must be intended to be a permanent
plan. There are certain items the plan must contain to be
considered a Cafeteria Plan according to IRC Section 125.
(See page 4-70)
Cafeteria Plans Cont’d
Benefit Elections
Usually irrevocable before the benefit becomes available or the
plan year begins. Changes or revocations during the plan year
are only allowed under limited circumstances.
IRS Regulations clarify employees’ right to revoke or change an
election during a plan year based on a change in status
• Marital status changes
• Changes in the number of dependents
• Employment status changes (applies to employee, spouse, or
dependent)
• Change in dependent status
• Residence change
• Adoptions
An election change can be made only if the status change results in
the employee, spouse, or dependent gaining or losing eligibility for
coverage under the plan
Cafeteria Plans Cont’d
Special Exceptions
• COBRA
• Medical Support orders
• Medicare or Medicaid eligibility
• Special enrollment rights under HIPPA
• Elective deferrals under a CODA
• FMLA leave changes
Election changes may also be made to reflect significant cost or
coverage changes for all types of qualified benefits provided under a
Cafeteria Plan during the plan year.
Contributions may be made to a HSA through a cafeteria plan, with
specific rules surrounding the pre-tax qualification
Option election for new employees – 30 days after hire date to elect
coverage
Cafeteria Plans Cont’d
Participation in a Cafeteria Plan must be restricted to employees
and the plan must be maintained for their benefit.
Nondiscrimination testing
• Plan cannot discriminate in terms of eligibility, contributions,
or benefits in favor of highly compensated individuals, or
participants, or key employees
• Three main nondiscrimination tests
◦ Eligibility test
◦ Contributions and benefits test
◦ Concentration test
• Special health benefits test
• Separate tests allowed for new employees
• Testing must be performed at year-end
Cafeteria Plans Cont’d
Flexible Spending Arrangements (FSA’s)
• Employees can elect a pre-tax salary deduction to pay for certain
covered health care, dependent care, and adoption expenses.
• There are specific requirements that FSA’s must meet
◦ Elections cover a full plan year
◦ Limit of $2,500. beginning in 2013
◦ No deferred compensation – “use it or lose it”
◦ Plan can allow a “grace period” up to 2 ½ months
◦ Unused balances can be distributed to reservists –
◦ “qualified reservist distributions” allowable if employer
decides to include it in the cafeteria plan
◦ Uniform coverage throughout coverage period
◦ 12 month period of coverage
◦ Prohibited reimbursements; claim substantiation; claims
incurred
◦ Limiting health FSA enrollment to health plan participants
Cafeteria Plans Cont’d
Flexible Spending Arrangements (FSA’s) (cont’d)
• Specific Requirements (continued):
◦ Reimbursements must be for medical expenses – health care
reform legislation has changed the definition of medical
expenses – only cost of medicines prescribed by a doctor and
insulin (for over-the-counter drugs, doctor must provide a
prescription to qualify for FSA)
• Coordination with HIPAA requirements
• FSA benefits followed transferred employees after asset sale
• Can be set up to use debit and credit cards for payments and
reimbursements with specific requirements
◦ After 1/15/11, FSA debit cards may not be used to purchase
over-the-counter medicines or drugs unless specific IRS rules
are followed
• Special dependent care assistance rules
Cafeteria Plans Cont’d
Tax Treatment of Cafeteria Plans
• Employer contributions are excluded from employee’s income – not
subject to federal withholding or employment taxes
• Pre-Tax contributions made by employee are excluded from
employee’s income – not subject to federal withholding, Social
Security, Medicare and FUTA taxes (401(k) plan pre-tax contributions
are subject to Social Security, Medicare, and FUTA taxes)
• Group-term life insurance – first $50,000. is not taxable
• After-tax contributions – totally taxable
W-2 Reporting
• 401(k) – does not reduce Social Security or Medicare taxable wages;
report amount of 401(k) deferral in Box 12, Code “D”
• Dependent care assistance – report amount in Box 10
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 Comp Plans for Public Sector and Tax-Exempt Groups IRC
457
• Employee-Funded Plans IRC 501(c)(18)(D)
• Individual Retirement Accounts (IRA)
• 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
Retirement and Deferred Compensation Plans Cont’d
Qualified Pension and Profit Sharing Plans – 401(a)
• Defined Benefit Plans
◦ Benefit to employee based on age, compensation level
and length of service
◦ Employer required to make contributions to plan
sufficient to provide level of benefits earned by employee
• 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.
◦ Payroll maintains records of hours worked, compensation
earned, dates of birth and hire date
Retirement and Deferred Compensation Plans Cont’d
Qualified Pension and Profit Sharing Plans 401 (a)
•
Types of 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 2012 annual compensation limit is $250,000 (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 $50,000 in 2012
(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.
•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.
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.
Cash or Deferred Arrangements (CODA)
Contribution Limits for 401(k)
• 2012 contribution limit is $17,000
◦ Adjusted for inflation in $500 increments
• Tax Treatment of 401(k) contributions
◦ Not taxable for Federal Income Tax (and 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 if any deductions in the tax year.
Catch-up” contribution began in 2002
• Under EGTRRA –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
◦ 2012 catch-up limit is $5,500
◦ Adjusted for inflation in $500 increments
• SIMPLE “catch-up”
◦ limit is $2,500 in 2012
◦ Adjusted for inflation in $500 increments
Cash or Deferred Arrangements (CODA)
Non Discrimination Testing
• Must not discriminate in favor of highly compensated
employees
◦ 5% owner of stock or capital
◦ Annual compensation over $115,000 in 2012 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.
Cash or Deferred Arrangements (CODA)
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)
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
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.
Cash or Deferred Arrangements (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 anti-discrimination testing.
Small Business Jobs Act of 2010 – allows participants in 401(k),
403 (b) and 457 plans with a qualified designated Roth
contribution program to roll over amounts distributed from these
plans to designated Roth accounts – effective September 27, 2010
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
◦ Employer can offer a 401(k) program IF it existed before the
Tax Reform Act of 1986
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.
Tax Shelter Annuities - 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.
Tax Shelter Annuities - 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
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
Excess deferrals included in box 12 but NOT included in box 1.
◦ Reported on 1099-R.
Deferrals can go to a Roth beginning in 2006
Tax Shelter Annuities - 403 (b)
• Catch-up special rule
◦ For employees with as least 15 years of service with
employer.
•
Amount of catch-up limited to the lesser of
◦ $3,000 additional contribution in any year (same as catchup 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.
IRC 457 (b)
•
•
•
•
Who can Offer
◦ State and local government employers and tax-exempt
organizations (other than churches)
Eligibility
◦ Only individuals performing services for the employer are
eligible (including independent contractors)
Nondiscrimination Testing
◦ 457 plans can be discriminatory.
Deferral Limits
◦
Same as 401(k)
IRC 457 (b)
•
•
•
Catch-up Contributions – new in 2002
◦ Same as 401(k)
Special rule near retirement
◦ 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 (b)
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
Tax Treatment
• Not subject to federal income tax withholding
• 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,
• in Box 3 and 5 & in Boxes 4 and 6
• Box 12 preceded by Code “G.”
• Employer should not mark check box in Box 13 “Retirement
plan” based on 457 deferrals
IRC 457(b)
Distributions
• 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
◦ Reported on 1099-R – Distributions from Pensions, Annuities,
Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc
◦ Distributions under a non-governmental plan – reported on
W2, box 1 and box 11
◦ Under the Small Business Jobs Act of 2010, deferrals can go to
a Roth IRA beginning in 2011; subject to federal, Social
Security, Medicare and FUTA taxation
Employee-Funded Plans – 501(c)(18)(D)
• Pension plans created before June 25, 1959 and funded solely by
employee contributions
◦ Does not discriminate in favor of highly-compensated
employees
◦ Deferrals are excluded from Income
• Taxation requirements
◦ Not subject to federal tax withholding
◦ IS subject to Social Security and Medicare withholding and is
reportable for FUTA taxation
• W-2 Reporting requirements
◦ Deferrals included in box 1 and box 12, code “H”
◦ Check box 13 for “Retirement Plan”
Individual Retirement Account (IRA)
Employer sponsored IRA must be in writing and created
for exclusive benefit of employees and beneficiaries.
• Contribution Limits
◦ 2012 --$5,000
◦ Adjusted for inflation to next multiple of $500
• Catch-up Provision
◦ Participant must be at least 50 by the end of the year.
◦ Additional $1,000 in years 2012 and beyond.
Individual Retirement Account (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:
• married employees filing a joint return at $92,000
• single $58,000
• married filing separately $00.
◦ Employee not active participant (but spouse is) reduction
starts at $173,000 for 2012 (married filing joint return)
◦ Taxability for deduction totally eliminated at $10,000 over the
above limits ($20,000 for joint filers beginning in 2007)
◦ Employer contributions included in income, but not subject to
federal withholding up to the amount the employer
reasonably believes the employee will deduct on their
personal 1040 form; totally taxable for Social Security,
Medicare and FUTA
Roth Individual Retirement Account (IRA)
Contributions
• Established by Taxpayer Relief Act of 1997
• Contributions are Taxable
◦ No phase-outs because of active plan participant status,
but amount allowed is reduced by contributions by the
individual to other IRAs for that year
• For 2012, deductions begin to be phased out once individual’s
adjusted gross income exceeds
◦ $173,000 for joint filers
◦ $110,000 for single filer
• For 2012, contributions are completely phased out at
◦ $183,000 for joint filers
◦ $125,000 for single filers.
Roth Individual Retirement Account (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.
• 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.
Simplified Employee Pensions – 408(k)
Commonly known as an SEP
• An IRA that meets requirements governing:
◦ Employee participation
◦ Non-discrimination in favor of highly compensated
employees’ withdrawls
◦ Written formula to determine employer contributions
• Employer must make contributions
◦ On behalf of all employees age 21 and over
◦ Employees that worked for employer at least 3 of the last 5
years
◦ Employees that earned at least $550. in 2012
• Contribution must be made based on the same compensationrelated formula for all employees up to $250,000. in
compensation in 2012
• W-2 Reporting
◦ Not in box 1; In box 12, code “F”; check box 13 for
“Retirement Plan”
Savings Incentive Match Plans for Employees of Small Employers
(SIMPLE Plans)
Contribution Limits and Requirements
• Employee can elect to defer $11,500 in 2012
• Deferral amount must be expressed as a percentage of
compensation
• “Catch up” contributions allowed for employees age 50 or older by
end of plan year
• Employer must match employee’s elective deferral dollar-for-dollar
up to 3%
◦ Employer may make a nonelective contribution of 2% of each
eligible employees’ compensation – employee must have at least
$5,000. in compensation for that year and employee doesn’t have
to defer any salary
• All employee elective deferrals and employer matching and
nonelective contributions must be fully vested and nonforfeitable
when made
• Employees have between Nov 2 and Dec 31 to participate in
SIMPLE plan for next year or modify their elective deferral amounts
Savings Incentive Match Plans for Employees of Small Employers
(SIMPLE Plans)
• SIMPLE IRA plan can include an automatic contribution
arrangement if employee does not make an affirmative election
• Tax treatment
◦ Not subject to federal withholding
◦ Subject to Social Security, Medicare, and FUTA taxes
◦ Employer matching and nonelective contributions are not
subject to taxation
• W-2 Reporting Requirements
◦ Deferrals not included in box 1
◦ Deferrals reported in box 12, Code “S”
◦ Check box 13 for “Retirement Plan”
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)
Tax Treatment
• Employer contributions are not wages and not subject to federal
income tax withholding, Social Security, Medicare, or FUTA.
◦ 2012 Limit: lesser of $50,000 or 100% of compensation
Non Qualified Deferred Comp Plan
American Jobs Creation Act of 2004 created IRC Section 409A which
places significant restrictions on nonqualified deferred compensation
plans
• Tightened rules governing inclusion of deferrals in gross income
for federal income tax purposes
• Expanded the types of compensation plans and arrangements
• Employee has a legally binding right during a taxable year to
compensation that has not been actually or constructively received
and included in gross income and is payable to him or her in a
later year
Emergency Economic Stabilization Act of 2008 created IRC Section
457A which provides that any compensation deferred under a
nonqualified deferred compensation plan of a nonqualified entity is
includible in the employee’s gross income where there is no
substantial risk of forfeiture of the right to such compensation
Non Qualified Deferred Comp Plan
• Employer plan to defer compensation to a later date which may or
may not coincide with retirement.
• Plans can be either funded or unfunded
◦ If unfunded, employee has only employer’s promise of money
◦ If funded, contributions & earnings based on them are wages
subject to federal income tax withholding when the employee’s
interest is vested
• The majority of these plans are unfunded
◦ Funds are not protected from employer’s creditors or
successors
If a nonqualified deferred compensation plan does not conform to the
restrictions of IRC Section 409A, all amounts deferred and other
vested amounts, plus earnings on those amounts, are subject to
federal income tax and an additional tax of 20% of the amount
included in income. In addition, interest will be charged on
underpaid taxes, calculated at the IRS underpayment rate plus 1%
Non Qualified Deferred Comp Plan
Tax Treatment
• Any deferrals or earnings included in income because of the new
rules in Section 409A are subject to federal income tax withholding
and should be treated as supplemental wages
• All amounts deferred under one or more nonqualified deferred
compensation plan in a calendar year of more than $600 must be
reported by the employer on Form W-2, whether or not the
amounts are included in income for that year; report in Box 12,
Code “Y” – Notice 2008-115 nullifies this requirement until
further guidance is issued
• Amounts required to be included in income must be reported on
Form W-2 in Box 1 and in Box 12, Code “Z”. Amount in Box 12
should include all amounts deferred under the plan for the taxable
hear AND all preceding taxable years (plus earnings) that are
currently includible in gross income under Section 409A
Non Qualified Deferred Comp Plan
Reporting Requirements
• Amounts deferred into plan are reported in Box 12, code “Y”
• Such deferrals are reported in Box 11, if for prior years 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
• Any deferrals/earnings included in income because of the new
rules in 409A are subject to federal income tax withholding and
taxed as supplemental wages
Calculating the amount includible in income upon a failure to meet
the requirements of Section 409A
1. Determine total amount deferred
2. Calculate portion of total amount deferred that is either subject to
a substantial risk of forfeiture or has been included in income in
a previous year
3. Subtract amount determined in step 2 from step 1 – excess is
includible in income and subject to additional income taxes
Non Qualified Deferred Comp Plan
Tax Treatments of Employer Contributions
• Doesn’t matter if plan is funded or unfunded
• Employer contributions & earnings are subject to Social Security,
Medicare and FUTA taxes on the later of:
◦ Date services are performed that form the basis for the
contributions; OR
◦ When there is no substantial risk of forfeiture of the
employee’s interest in the funds
Reporting Requirements
• Employer contributions to an unfunded nonqualified deferred
compensation plan are not included in income
• Amounts deferred to a funded, secured plan are income if
employee has no risk of losing the benefits; must be reported in
Box 1 and Box 11
Take one thing at a time. . .
There is a lot in this section
You Can Do IT !!!!