HS326 Chapter 10 Employee Benefits
What are some tax free fringe benefits?
Benefits related to education and the family are received tax-free up to certain limits that rarely cover 100% of their cost. -Educational expenses, up to $5,250 (2020) -Dependent care assistance, up to $5,000 (2020) -Adoption assistance, up to $14,300 (2020) Any benefit directly related to performing work is generally received tax-free: -Business travel, including flights and business use of a company car -Business meals and entertainment -Subscriptions to professional magazines -Membership in professional organizations -Use of a work computer, phone, or office supplies -Payments to cover the commute to and from work, up to $255 per month (2020) -Diminimis benefits and awards are generally received tax-free -Employers and employees must be careful to truly leave these benefits diminimis or the IRS will deem them to be compensation
HSAs vs. FSAs. What are the major differences?
Both flexible spending accounts (FSAs) and health savings accounts (HSAs) allow employees to use pre-tax dollars to pay for medical expenses. If funds within either are used for non-medical expenses, employees must pay tax and a penalty. Employees (and their spouses) may only use one or the other. Major differences include: -Only employees with high-deductible health insurance may open an HSA. -HSAs have higher annual contributions limits. -Most of the funds within an FSA expire annually while HSA funds carry forward year after year.
Compared to individual benefit plans, group plans offer advantages for both employees and employers: What are they?
-Lower rates -Better coverage -Employer can deduct costs -Employee excludes value from taxable income
What are the four rules used to determine the value of a fringe benefit?
-general valuation rule -cents per mile rule -commuting rule -lease value rule
What are some tax free fringe benefits for group benefits?
-group medical plans -group health insurance -affordable care act (2010)
What is Veba and Explain the major benefits that a Voluntary Employees' Beneficiary Association (VEBA) can and cannot provide.
A VEBA is a trust established by an employer to hold funds to provide employee welfare benefits in the future. At the time of the contribution to the VEBA, the employer receives an income tax deduction. Advantages of a VEBA are: -Accelerates a tax deduction for the employer -Provides benefit security for employees A VEBA uses an actuarial funding determination; the actual cost of benefits may be more or less than the employer contribution. Let's review the chart below to learn more about what a VEBA can and cannot provide for an employer and employees.
What is the de minimis fringe benefit?
A de minimis fringe benefit is any property or service provided to an employee by an employer that is so small in value that it makes accounting for it unreasonable.These fringe benefits may be discriminatory and could include de minimis meals and de minimis transportation.
What is a fringe benefit?
A fringe benefit is a form of compensation where a benefit other than customary taxable wages is provided to an employee for the performance of services for an employer. An employer may offer fringe benefits to be more competitive in the labor market. Fringe benefits are generally a tax-advantageous form of compensation.
Give the taxation for dependent care assistance:
An employee may exclude a portion of the value of dependent care services provided by his employer from his gross income -Must be nondiscriminatory -Subject to many requirements -The services must allow an employee to work -The services must be provided for one of the following qualifying persons: -Dependent children under 13 years of age, -Dependent children who are physically or mentally incapable of caring for themselves, or -An employee's spouse if the spouse is physically or mentally incapable of caring for himself. An employee may exclude up to the lesser of: -$5,000 annually ($2,500 for MFS), or -The earned income of the employee or his spouse. Dependent care may also include pre-tax contributions made by an employee to a dependent care flexible spending account (FSA).
What are adoption Adoption Assistance Programs? with respect to taxation
An employee can exclude from his gross income the amount paid for, or expenses incurred by, his employer for qualified adoption expenses. The adoption assistance program must be in writing. -Limited to an exclusion of $14,300 per adopted child - phased out with AGI of $214,520 to $254,520 (2020) -Must be nondiscriminatory
What are no additional cost services? with respect to taxation
An employee can exclude the value of services provided by an employer that does not cause the employer to incur any substantial additional cost or loss of revenue. Services or product must be offered to customers in the ordinary course of the employer's business. Lost or foregone revenue is considered a cost and would not be considered a "no additional cost service." -Must be nondiscriminatory Examples: Airline, movie theater, bowling alley
Qualified Tuition reduction plans with respect to taxation?
An employee may exclude from gross income any amount representing a qualified tuition reduction. The amount of any reduction in tuition provided to an employee of an educational institution for education (below graduate level) for the employee, the employee's dependent children, the employee's spouse -Must be nondiscriminatory
What is qualified transportation and parking? with respect to taxation
An employee may exclude the value of transportation benefits provided by his employer from his gross income. Transportation benefits: -$270 for 2020 per month for transit pass -$270 for 2020 per month for parking on or near the employee's place of work -Provision may be discriminatory It is important to note that the TCJA disallows an employer deduction for expenses associated with providing any qualified transportation fringe benefit to employees except for ensuring safety of an employee.
What is the lease value rule?
An employer uses the Annual Lease Value Table to determine the value of an automobile provided to an employee by using it's annual lease value.
What are cafeteria plans?
Cafeteria plans are written plans that allow employees to receive cash (as compensation) or defer receipt of the cash to purchase certain qualified tax-free fringe benefits. Tax advantages depend on whether an employee elects to receive cash: -Cash received by the employee is taxable income and is subject to payroll taxes -Value of fringe benefits purchased are excluded from employee's taxable income and are not subject to payroll taxes -Must be nondiscriminatory for tax advantages to apply -Cash or benefit received by employee is a deductible expense for employer
Dependent Care Assistance, a form of fringe benefits is what? Explain also adoption assistance programs
Free or low-cost on-site daycare Vouchers to local childcare services Adoption Assistance Programs - An employee can exclude from his gross income the amount paid for, or expenses incurred by, his employer for qualified adoption expenses. -Limited to an exclusion of $14,300 per adopted child - phased out with AGI of $214,520 to $254,520 (2020) Must be nondiscriminatory
What is a qualified moving expense reimbursement? with respect to taxation
If an employer reimburses an employee for qualifying moving expenses, the employee can exclude the reimbursement from his gross income Qualifying moving expenses: -Expenses related to a qualifying move -Deductible moving expenses It is important to note that the TCJA suspends deduction for moving for taxable years 2018 through 2025. However, the provision is retained for active duty members of the military that move pursuant to a military order and incident to a permanent change of station.
True or false.
In order to determine the tax impact for an employee whose employer provides group term life insurance coverage in excess of $50,000, we need to quantify the taxable cost of the premiums according to the IRS Uniform Premium Table.
What are some uses and application of cafeteria plans?
It may be best for businesses to use Cafeteria Plans under the following circumstances: -Employee benefit needs vary within the employee group -Employee group is mixed -Employees want to choose the benefit package most suited for themselves and their family Cafeteria Plans can help the employer manage cost of fringe benefit plan while giving employees appreciation of the value of the benefits provided by their employer
Give the taxation for meals?
Meals provided to an employee for the benefit of the employer may be excluded from gross income. The value of the meal is excludable from employee's gross income if the meals are furnished: -For the convenience of the employer, and -On the employer's business premises It is important to note that the TCJA modified these rules for years after 2017. These expenses are subject to 50% limitation after 2017 and not deductible after 2025.
What are common fringe benefits?
Meals and lodging furnished for the convenience of the employer Free lunch Free or low-cost on-site housing Athletic facilities furnished by the employer Educational Assistance Programs Qualified Tuition Reduction Plan Free or low-cost training Student loan forgiveness Lower insurance premiums
Work Condition Fringe Benefits are what?
Qualified Moving Expense Reimbursement Qualified Transportation and Parking No-additional-cost services -Free legal advice -Free financial advising Qualified employee discounts Working condition fringe benefits -Choice of office furniture -On-site arcade and games Prizes and Awards De minimis Fringe Benefits
Explain what a nondiscrimination requirement is and how fringe benefits can benefit a wide range of persons beyond the employee, including spouses, dependents, retirees, directors, and in some cases independent contractors.
Some fringe benefits require that the benefits do not discriminate in favor of certain employees (Key and Highly compensated employees) in order for the value of the benefit to remain excluded from the employee's taxable income.
What is Cobra and what are its provisions?
The Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985: -Provides coverage to covered employees and qualified beneficiaries who have lost group medical plan coverage -Applies to employees of employers that maintain a group health plan and employ 20 or more people A COBRA election begins on the date of the qualifying event and must be taken within 60 days of the qualifying event. Qualifying events include: -Job loss (except due to the gross negligence of the employee) -Employee death -Employee disability -Divorce (group coverage may be maintained by employee's spouse and children)
What is the cents per mile rule?
The cents per mile rule is used to determine the value of a vehicle provided to an employee for personal use. The value is determined by multiplying the standard mileage rate by the total miles the employee drives the vehicle for personal purposes. In 2020, the standard mileage rate is 57.5 cents per mile.
Give the taxation for educational assistance programs:
The employer's payment of expenses incurred on behalf of an employee for education, or the employer's provision of education to an employee -Up to $5,250 of expenses may be excluded from the employee's gross income -Must be nondiscriminatory -The rules of IRC 127 must be followed It is important to note that per the passage of the CARES Act, student loan repayment assistance incurred in 2020 is considered qualifying education assistance under IRC 127.
What is the general valuation rule?
The general valuation rule is commonly used to determine the value of fringe benefits. According to the general valuation rule, the value of a fringe benefit is its fair market value
What is the affordable care act of 2010?
The passage of the ACA (2010) changed the landscape of group medical plans: -Eliminates pre-existing conditions -Ends lifetime limits on coverage -Increases age children can remain on parent's policy to age 26 -Creates federal and state exchanges to purchase health insurance -Imposes penalties for those who are not covered with health insurance* -Required for employers with more than 50 FTEs (full time equivalents) * Individual mandate eliminated by TCJA for years after 2017. Health insurance policies obtained in the individual market must provide "essential benefits," including ambulatory services, emergency services, hospitalization, maternity and newborn care, pediatric services, rehabilitation and mental health services, prescription drugs, and laboratory and preventative wellness services. -Bronze Plan - a plan that pays the actuarial equivalent of 60% of the estimated costs of health services. -Silver Plan - a plan that pays the actuarial equivalent of 70% of the estimated costs of health services. -Gold Plan - a plan that pays the actuarial equivalent of 80% of the estimated costs of health services. -Platinum Plan - a plan that pays the actuarial equivalent of 90% of the estimated costs of health services.
Explain the taxation of fringe benefits basics?
The value of a fringe benefit provision is considered taxable as wages to the employee, unless a specific exception in the tax law applies, and is able to be deducted by the employer.
What is the commuting rule?
The value of a vehicle provided to an employee for commuting purposes is determined by multiplying each one-way commute by $1.50.
What are awards and prizes with respect to taxation?
The value of certain prizes and awards given to employees by their employers may be excluded from the employee's gross income -Length of service awards -Presentation awards Awarded only under certain conditions (e.g., a contest) that do not create a significant likelihood of disguised compensation -Cash and cash equivalent (e.g., gift cards) may not be excluded from income -Other tangible personal property may be excluded up to the following limits: -$400 per taxable year for all nonqualified plan awards -$1,600 per taxable year for all qualified plan awards (i.e., non-discriminatory)Uu
What is a qualified employee discount? with respect to taxation
The value of employee discounts is excluded from an employee's gross income and the discount exclusion does not apply to real property or investment property. Exclusion limit: -Service - 20% of the price of the service to nonemployee customers -Products - the employer's gross profit percentage multiplied by the price the employer charges nonemployee customers -Nondiscrimination rules apply
Give the taxation for lodging:
The value of lodging provided to an employee is excluded from his taxable income if: -The lodging is furnished on the employer's business premises, and -The lodging is furnished for the convenience of the employer, and -The employee is required to accept the lodging as a condition of his employment
Give the taxation for athletic facilities furnished by the employer:
The value of on-premise athletic facilities provided by an employer to an employee is not included in the employee's gross income if the facility is: -Operated by the employer, and -Located on the employer's business premises, and -Substantially all of the use of the facility is by employees of the employer, their spouses and their dependent children
What are working condition fringe benefits? with respect to taxation
The value of working condition fringe benefits provided by an employer are excluded from an employee's gross income Working Condition Fringe Benefit: Any property or service provided to an employee that enables the employee to perform his work and, if paid for by the employee, would be deductible as a trade or business expense. -May be discriminatory Examples: Car, Hotel, Travel
With respect to taxes what is group term life insurance?
While permanent insurance is taxable to an employee, group term life insurance has a different set of tax rules that apply: -The cost of up to $50,000 of coverage is excluded from the employee's gross income. -Amounts over this are taxable to the employee. -If the plan discriminates, key employees must include the cost of group term life insurance in their gross income. -The cost that is reported is the greater of table cost or the actual cost (premiums) of the coverage to the employer
