Taxable and Non-Taxable Employee Benefits

Transcription

1 Taxable and Non-Taxable Employee Benefits Anita Robinson EA 61576, LTC 5491 Synergy Tax & Accounting, Inc. 800 NE Tenney Rd, Suite Vancouver WA or

2 Disclaimer Seminar materials are intended to stimulate thought and discussion and to provide attendees with useful ideas and guidance in the areas of federal taxation. These materials as well as the comments of the instructor do not constitute and should not be treated as tax advice regarding the use of any particular tax procedure, tax planning technique or suggestion or any of the tax consequences associated with them. This information is provided for educational purposes only. Although the author has made every effort to ensure the accuracy of the materials, neither the author nor the presenter assumes any responsibility for any individual s reliance on the written or oral information presented during the presentation. Each attendee should verify independently all statements made in the materials and during the seminar presentation before applying them to a particular fact pattern and should determine independently the tax and other consequences of using any particular technique or suggestion before recommending the same to a client or implementing the same on a client s or on his or her own behalf. References Publication 15B Employer s Tax Guide to Fringe Benefits Publication 503 Child and Dependent Care Expenses Publication 535 Business Expenses Publication 969 Health Savings Accounts and other Tax Favored Health Plans Form 8889 Health Savings Accounts and Instructions Form 1099 SA and Instructions Schedule A Instructions Notices

3 Table of Contents A. Introduction B. Benefits that can be offered through Cafeteria Plans IRC Adoption Assistance IRS Health Savings Accounts (HSA) IRC Dependent Care Assistance IRC Group Term Life Insurance IRC 79 C. Benefits that cannot be offered through Cafeteria Plans 1. Educational Assistance IRC Employee Discounts and De Minimus Benefits IRC Health Reimbursement Arrangement (HRA) IRC 105(b) 4. Meals and Lodging IRC No Additional Cost Service IRC 132(b) 6. Transportation Benefits IRC 132(f) D. Other Employee Benefits 1. Achievement Awards IRC 274(j)(4) 2. Athletic Facilities IRC 132(j)(4) 3. Working Condition Fringe Benefits IRC 132(d) 4. Tuition Reduction IRC 117(d) 5. Flexible Spending Arrangements (FSA) IRC 125 3

4 Tax Treatment of Fringe Benefits A fringe benefit is a form of pay in addition to regular pay. Under IRC 61 all employee compensation is taxable unless specifically excluded by law. Some compensation may be fully taxable, some nontaxable and some partially taxable. First we need to establish who is an employee for the purpose of fringe benefit taxability. Typically fringe benefits are only offered to common law employees. C Corporation shareholders can generally take advantage of tax free benefits; however partners in a partnership and more than 2% shareholders in an S-Corporation cannot exclude most benefits from income. 2% shareholders for this purpose are treated as partners in a partnership (IRC 1372). Furthermore family members are also considered 2% shareholder or partners. (IRC 318) Some benefits are available tax free to volunteers and members of the board of directors as well. In addition, non-discrimination rules are designed to prevent business owners from taking tax free benefits only for themselves without offering those same benefits to their employees. This also applies to related parties. Example: The taxpayer is a 100% owner in an S-Corporation; the spouse owns 100% of a C-Corporation. The C- Corporation s only employee is the spouse. The C-Corporation pays health insurance for its employees. The S-Corporation has employees including the taxpayer, but offers no health insurance benefits. Not only does this fall under the nondiscrimination rules, but also the related party rules. If only key employees receive benefits, the value of those benefits must be included in taxable income subject to all payroll taxes. The terms highly compensated and key employee can have different meanings depending on the fringe benefit offered. Under an accountable plan all reimbursements are excluded from income if 1. there is a business purpose for the expense 2. there is adequate accounting 3. any excess reimbursements must be returned to the employer within a specified time period Any payments made under a non-accountable plan are taxed as wages. 4

5 Special Rules for Various Types of Fringe Benefits Type of Fringe Benefit Income Tax Withholding Social Security and Medicare (including Additional Medicare Tax when wages are id i Accident and health benefits Exempt 1,2, except for long-term care benefits provided through a flexible spending or similar arrangement. Achievement awards Exempt, except for certain payments to S corporation employees who are 2% shareholders. Exempt 1 up to $1,600 for qualified plan awards ($400 for nonqualified awards). Federal Unemployment Exempt Adoption assistance Exempt1,3 Taxable Taxable Exempt if substantially all use during the calendar year is by employees, their spouses, and Athletic facilities their dependent children and the facility is operated by the employer on premises owned or leased by the employer. De minimis (minimal) benefits Exempt Exempt Exempt Dependent care assistance Exempt 3 up to certain limits, $5,000 ($2,500 for married employee filing separate return). Educational assistance Employee discounts Employee stock options Employer-provided cell Group-term life insurance coverage Exempt up to $5,250 of benefits each year. (See Educational Assistance, later in this section.) Exempt 3 up to certain limits. (See EmployeeDiscounts, later in this section.) See EmployeeStockOptions, later in this section. Exempt if provided primarily for non-compensatory business purposes. Exempt Exempt 1,4, 7 up to cost of $50,000 of coverage. (Special rules apply to former employees.) Exempt Health savings accounts Lodging on your business Meals Exempt for qualified individuals up to the HSA contribution limits. (See HealthSavingsAccounts, Exempt 1 if furnished for your convenience as a condition of employment. Exempt if furnished on your business premises for your convenience. Exempt if de minimis. Moving expense Exempt 1 if expenses would be deductible if the employee had paid them. No-additional-cost services Exempt 3 Exempt 3 Exempt 3 Retirement planning services Exempt 5 Exempt 5 Exempt 5 Transportation (commuting) benefits Tuition reduction Exempt 1 up to certain limits if for rides in a commuter highway vehicle and/or transit passes ($130), qualified parking ($250), or qualified bicycle commuting reimbursement 6 ($20). (See Transportation(Commuting)Benefits, later in this section.) Exempt if de minimis. Exempt 3 if for undergraduate education (or graduate education if the employee performs teaching or research activities). Working condition benefits Exempt Exempt Exempt 1 Exemption does not apply to S corporation employees who are 2% shareholders. 2 Exemption does not apply to certain highly compensated employees under a self-insured plan that favors those employees. 3 Exemption does not apply to certain highly compensated employees under a program that favors those employees. 4 Exemption does not apply to certain key employees under a plan that favors those employees. 5 Exemption does not apply to services for tax preparation, accounting, legal, or brokerage services. 6 If the employee receives a qualified bicycle commuting reimbursement in a qualified bicycle commuting month, the employee cannot receive commuter highway vehicle, transit pass, or qualified parking benefits in that same month. 7 You must include in your employee's wages the cost of group-term life insurance beyond $50,000 worth of coverage, reduced by the amount the employee paid toward the insurance. Report it as wages in boxes 1, 3, and 5 of the employee's Form W-2. Also, show it in box 12 with code C. The amount is subject to social security and Medicare taxes, and you may, at your option, withhold federal income tax and Medicare taxes, and you may, at your option, withhold federal income tax. 5

6 Benefits that can be offered through Cafeteria Plans IRC 125 A written plan is required to establish cafeteria plans. Benefits are excludible from income tax and most are also excludible from Social Security and Medicare taxes, as well as, state taxes. Benefits that can be offered through a cafeteria plan include: a. Accident and health benefits such as Aflac b.accidental death and dismemberment insurance c. Adoption assistance d.contributions to Health Savings Accounts (HSA s) e.dependent care assistance f. Group-term life insurance up to $50,000 g. Long or short term disability insurance h.premiums for COBRA Note: In Oregon, for unemployment tax purposes, payments made through cafeteria plans are considered wages unless specifically excluded under Oregon law. However, they are not subject to state withholding, nor transit taxes. (OSR (2) (L) and ORS ) 1. Adoption Assistance IRC 137 a. An employer must have a written plan that meets the following requirements: i. It is a benefit for all employees who qualify under rules determined by the employer and does not favor highly compensated employees. ii. No more than 5% of payments can be for shareholders or their spouses or dependents. A shareholder for this purpose is someone who owns more than 5% of the stock or profit interest of the business. iii. Reasonable notice of the plan must be given to eligible employees. iv. Employees must provide substantiation for qualifying expenses. b. Payments made under a qualified adoption reimbursement plan are not subject to federal withholding, but are subject to social security, Medicare and federal unemployment taxes. c. The limits are $13,190 for 2014 and $13,400 for 2015, reported on Form W2 box 12 code T. 6

7 2. Health Savings Accounts (HSA) IRC 223 A health savings account is a tax exempt account owned by a qualified individual and set up with a qualified HSA trustee. It is used to pay for unreimbursed out of pocket medical expenses incurred by the taxpayer, his spouse and his dependents. a. The individual must be covered by a High Deductible Health Plan in order to qualify for a Health Savings Account. a. The employer, as well as the employee may make tax deductible contributions to a Health Savings Account, not to exceed certain dollar limitations. b. For 2014 the maximum contribution is $3,250 for self only coverage and $6,450 for family coverage. These amounts are increased by $1,000 for any qualified individual age 55 or older at any time during the year. c. The 2015 contribution limits are $3,350 for individual coverage and $6,650 for family coverage with an annual deductible of at least $1,300 and no more than $6,450 for individual coverage and at least $2,600 but no more than $12,900 for family coverage. d. The 2016 contribution limits are $3,350 (no change from 2015) for individual coverage and $6,750 for family coverage with an annual deductible of at least $1,300 and no more than $6,550 for individual coverage and at least $2,600 but no more than $13,100 for family coverage. HSA Limitations Annual contribution is limited to Self-only coverage under age 55 $3,350 $3,350 $3,250 Self-only coverage age 55 or older $4,350 $4,350 $4,250 Family coverage under age 55 $6,750 $6,650 $6,450 Family coverage age 55 or older $7,750 $7,650 $7,450 Minimum annual deductibles Self-only coverage $1,300 $1,300 $1,250 Family coverage $2,600 $2,600 $2,500 Maximum annual deductible and out-of-pocket expense limits Self-only coverage $6,550 $6,450 $6,350 Family coverage $13,100 $12,900 $12,700 e. An employer must follow the nondiscrimination rules when making contribution to a Health Savings Account. The contribution must be comparable for all employees who have comparable 7

8 coverage, otherwise there will be an excise tax of 35% of the total amount contributed to all HSA s f. Qualified expenses must not be eligible for reimbursement by the health insurance provider i. Qualified expenses do not include insurance premiums for the high deductible plan 1) unless the individual was receiving unemployment compensation and the distributions were used to pay for health insurance during the time of unemployment or 2) if over age 65 then health insurance premiums are allowable expenses except for any Medigap premiums ii. Qualified expenses are medical expenses that would otherwise be deductible on Schedule A g. Any funds remaining at the end of the year carry over to the next year. The participant is fully vested at all times. h. Expenses paid for with Health Savings Account funds cannot be used as a deductible medical expense on Schedule A of the tax return no double dipping allowed i. HSA funds cannot be used to pay for health insurance except for long term care or health insurance while receiving unemployment compensation j. Distributions used for non-medical purposes are subject to a 20% penalty unless the participant has reached age 65 or is deceased k. Partners and 2% S-Corporation shareholders are not eligible for pre-tax HSA contributions, if paid for by the employer. These employer contributions would be included in income, either as guaranteed payments for partners and box 1 wages for 2% S-Corporation shareholders. However, partners and S-Corporation shareholders can contribute to their own personal HAS outside of the business l. Employer HSA contributions are reported on Form W2 box 12 with code W. Distributions are reported by the custodian on form 1099-SA m. If the HSA participant dies and the spouse is the beneficiary, the spouse is treated as the participant in the HSA. If someone other than the spouse inherits the HSA the fair market value is taxable to the beneficiary. Any taxable amount is reduced by qualified medical expenses paid within one year after the date of death. n. Wages or self-employed earnings are not required to contribute to an HSA Note: California does not conform to federal legislation, therefore HSA contributions are not deductible and earnings are not tax deferred and must be included in taxable income. 8

9 3. Dependent Care Benefits IRC 129 a. Up to $5,000 ($2,500 MFS) can be set aside for dependent care expenses either as a pre-tax benefit or funded fully or partially by the employer. Benefits provided to more than 5% S- Corporation shareholders and partners in a partnership cannot exceed 25% of the total paid by the employer for all employees (IRC 129 (a)(4)). b. The following are treated as employees for this benefit: i. Current employees ii. Leased employees iii. A sole proprietor iv. A partner who performs services for a partnership For more information refer to Publication 503, Child and Dependent Care Expenses. 4. Group Term Life Insurance IRC 79 a. The cost of group term life insurance up to $50,000 can be excluded from taxable income, however this benefit cannot be offered to the employees spouse or dependents except under the de minimis rules. The allowed benefit is $2,000 b. If not all employees are covered group term life insurance must be paid for at least 10 employees and the coverage is based on either the same percentage of pay or the insurer s coverage brackets that meet specific requirements. Any coverage over $50,000 must be included in taxable income based on an age weighted formula. Cost Per $1,000 of Protection for 1 Month Age Cost Under $ through through through through through through through through through and older You calculate the amount to include in wages by multiplying the monthly cost by the number of full months coverage at that cost. 9

10 C. Benefits that cannot be offered through Cafeteria Plans Some benefits cannot be offered through a cafeteria plan, such as a. 403(b) plans b. Educational assistance c. Employee discounts d. Health reimbursement arrangements (HRA s) e. Lodging on the employer s premises f. Long term care insurance g. Meals h. Moving expense reimbursements i. No-additional-cost services j. Transportation benefits k. Tuition reduction l. Working condition benefits 1. Educational Assistance IRC 127 a. Employers must have a written plan and can provide up to $5,250 of tax free education assistance during the year. b. The funds must be used for the cost of tuition, books, or fees. If used for equipment and supplies they are not excludible from income. c. The cost of graduate level courses is excludible, however the exclusion does not apply to education involving sports, games or hobbies unless there is a reasonable relationship to the employer s business or is required as part of a degree program. d. Any costs in excess of $5,250 may still be excludible as a working condition fringe benefit. 2. Employee Discounts and De Minimis Benefits IRC 132 a. De minimis is a Latin expression meaning about minimal things. Under Internal Revenue Service guidelines, the de minimis rule can also apply to any benefit, property, or service provided to an employee that has so little value that reporting for it would be unreasonable or administratively impracticable b. Examples of de minimis benefits (IRC 132)(e) are: i. Holiday gifts with low fair market value, other than cash 10

11 ii. Meals and snacks provided when employees are working overtime iii. Meals provided at the employer s cafeteria iv. Parties and picnics for employees and guests v. Personal use of an employer-provided cell phone vi. Use of the photocopier, but no more than 15% personal use Note: If employee meals are part of company policy or a union contract they are not excludible as de minimus benefits because it is not occasional and the benefit is required to be provided by the employer. However, they may still be excluded if the meals are on the employer s premises and are provided for the convenience of the employer. Facts and circumstances determine the tax treatment. c. Employee discounts for property or services offered to customers, except real property or stocks and bonds. (IRC 132(c) Example: i. The exclusion is limited to 20% of the price charged to customers or ii. up to the price charged to customers times the gross profit percentage. Nike sells sneakers for $100 a pair. The maximum employee discount would be $20. If the cost of the shoes is $30 (gross profit percentage is 30%) then the allowable exclusion would be $30 and the employee pays $70 for the shoes. d. Employee discounts must be available to all employees at the same rate or the benefit must be included in wages for highly compensated employees. e. Everyone receiving de minimis benefits is considered an employee, but only the following can get employee discounts tax free: i. A current employee ii. A former employee who has retired or left on disability iii. A widow of an employee iv. A widow of a former employee who retired or left on disability v. A leased employee vi. A partner who performs services for the partnership f. De minimis benefits are exempt from withholding as well as Social Security and Medicare taxes. 11

12 3. Health Reimbursement Arrangement (HRA) IRC 105(b) a. Health Reimbursement Arrangements that are not integrated with an employer health plan are prohibited under ACA, unless the HRA applies only to excepted benefits such as vision and dental, or is set up only for retirees b. Single shareholder C-Corporations like to use Health Reimbursement Arrangements to cover medical expenses. Under the new rules they now must have an employer sponsored group plan. Most states don t allow for group plans for one employee. Oregon no longer allows group plans for a husband and wife, even if both are shareholders and employees of the corporation. c. The employer must have a written plan and maintain health insurance coverage for the employees d. Employees under the age of 25 and those who have not worked for the employer for at least three years can be excluded e. Since a Health Reimbursement Arrangement is completely employer funded the employer sets the limit on reimbursements f. There is no minimum or maximum on out-of-pocket deductibles as long as the reimbursements are for qualified expenses. Expenses allowed on Schedule A as medical expenses are considered qualified expenses. g. The Internal Revenue Code does not set limits for carryover from one year to the next, however the employer may do so. For example the employer allows $5,000 of medical expense reimbursement, but the employee only has $3,000 of actual expenses. The remaining $2,000 does not carry to the next year and add to next year s $5,000 allowance. h. Distributions are tax free if used to pay for out of pocket medical expenses or health insurance premiums. If the plan allows distributions for anything other than medical expenses, then all distributions become taxable i. Distributions used for non-medical purposes are taxable and are subject to a 20% penalty 12

13 4. Meals and Lodging IRC 119 a. Meals may be excluded from income if they are i. Furnished on the employers premises and ii. For the convenience of the employer b. Lodging may be excluded from wages if provided on the employer s premises and for the convenience of the employer and it is a condition of the job. Examples include park rangers, firefighters and apartment managers. c. Qualified employee meals are 100% deductible. d. For this benefit everyone receiving the benefit is treated as an employee, except highly compensated employees who receive free meals at an employer provided facility that is not available to all employees on the same terms i. Highly compensated in this case means an employee who meets either of the following tests: 1) Is a 5% owner at any time during the current or preceding tax year or 2) received more than $115,000 of pay in the preceding year, except this rule can be ignored if that employee was not also in the top 20% of employees ranked by pay. e. Meals on the employer s business premises and for the employer s convenience: i. If more than half of employees receive meals for the employer s convenience then all employee meals are excluded from wages ii. Meals for food service employees provided during or immediately before or after working hours are considered for the employer s convenience. Fast food restaurants for example. iii. When employees have to be available for emergency calls during meal periods employer provided meals may be considered as furnished for the employer s convenience. The employer must show that this has happened in the past or can be reasonably expected to occur in the future. iv. Meals provided by the employer because proper meals are not otherwise available, for example there are very few eating establishments near the workplace, for example workplaces in remote areas v. In case the meal periods are too short to go eat anywhere else f. This exclusion does NOT apply to 2% shareholders 13

14 Note: In Oregon, meals and lodging are subject to unemployment tax, except when provided for agricultural labor or domestic service or are reimbursable travel expenses. (OAR ) Meals are also subject to withholding and transit taxes unless furnished for the convenience of the employer and provided on the employer s premises. (OAR (2)-(A)) Lodging is subject to both withholding and transit taxes, unless furnished on the employer s premises, for the employer s convenience and as condition of employment. Note: Federal law supersedes any state statute, employment or union contract when determining if meals and lodging benefits are taxable. Example: an employee of a state institution is required to reside at the institution in order to be available for duty at all times. Under state statute, the employee s lodging is regarded as part of compensation. Although the fair market value of the lodging is subject to state tax, as well as state unemployment tax, for federal tax purposes it is not taxable. 5. No Additional Cost Service IRC 132(b) g. No additional cost services are services for which the employer does not incur substantial additional costs. These services must also be offered to customers. h. No additional cost services are excess capacity services such as airline tickets, hotel rooms or telephone services provided free or at reduced rates to employees working in those lines of work. i. In order to determine if the additional costs are substantial or not, the employer has to count any lost revenue as a cost. This cost cannot be decreased by any amount the employee pays j. For the exclusion of no additional cost services all the following are treated as employees: vi. A current employee vii. A former employee who has retired or left on disability viii. A widow of an employee ix. A widow of a former employee who retired or left on disability x. A leased employee xi. A partner who performs services for the partnership 14

15 k. Any services provided to a spouse or dependent child is considered as provided to the employee l. Air transportation used by the parent of an employee, except the parent of a deceased employee, is also considered as use by the employee. m. This exclusion from income does not apply to highly compensated employees (5% owner any time during the year; More than $115,000 in pay for the preceding year) 6. Transportation Benefits IRC 132(f) a. Certain transportation benefits provided to employees can be excluded from income. These benefits can be paid directly by the employer or reimbursed through an accountable plan. b. Transportation benefits can include: i. Transit passes of up to $250 per month (2014); as of this writing this amount has been reduced to $130 per month for 2015 ii. Parking at the business location of up to $250 per month for 2014 and 2015 iii. Qualified transportation benefits also include reimbursements for bicycle commuting of up to $20 per month for each qualified bicycle commuting month. A qualified bicycle commuting month is any month in which the employee regularly uses his or her bicycle for a substantial portion of travel between the employee s residence and the place of employment and the employee does not receive any other transportation benefit for that month c. Self-employed individuals, partners and 2% S-Corporation shareholders do not qualify for transportation benefits. Do not treat the benefit as a reduction in distributions to the 2% shareholder, it is an addition to wages d. Transportation benefits are exempt from withholding as well as Social Security and Medicare taxes. e. Transportation benefits are available through pre-tax salary reduction arrangement, but cannot be included in a cafeteria plan IRC 132(f)(4) f. Non-discrimination rules do not apply to Qualified Transportation Benefits 15

16 g. Frequent Flyer Miles i. As of this writing it is still not clear whether the value of frequent flyer miles for employees who frequently travel for their employers is taxable to the employees. The tax treatment of frequent flyer bonus programs, or similar programs, has been infrequently addressed by the Internal Revenue Service. It could be argued that the awards are excludable from income to the employees as working condition fringe benefits. Even though the employer did not directly provide the benefit, the employer did pay the original travel expenses that triggered the issuance of the award. Although the IRS has attempted to tax these benefits (see P.J. Charley, especially in cases where the employer pays for miles earned by its employees on business, it indicated following the release of IRS Letter Ruling that it has no special enforcement program for frequent flyer miles. ii. However, the conversion into cash of frequent flier miles earned during business is taxable as wages. iii. Consistent with prior unofficial policy, frequent flyer miles earned as the result of business or government travel are not be used in determining taxable income ( Announcement ) 16

17 D. Other Employee Benefits 1. Achievement Awards IRC 274(j)(4) a. Awards for either length of service or safety achievements are excludible from income as long as they are tangible personal property and do not exceed $1,600 of fair market value per calendar year under a qualified plan or $400 under a non-qualified plan. b. However, cash and cash equivalents, such as gift certificates, event tickets, etc. are taxable compensation, as are prizes won at random drawings or awards for job performance such as employee of the month awards c. The award must be given for length of service or safety and must be awarded as part of a presentation and cannot be disguised as wages d. All the following are considered employees for this benefit: i. Current employees ii. Former common-law employees the employer maintains coverage for based on an agreement relating to prior service iii. Leased employees who have worked for the employer for a least one year on a substantially full time basis e. More than 2% S Corporation shareholders are not considered employees. f. Safety awards given to managers, clerical workers, administrators or professional employees are taxable compensation. g. In addition, if more than 10% of employees have already received a safety award, then any awards beyond that 10% will be taxable as wages 2. Athletic Facilities IRC 132(j)(4) a. As long as the facilities are located on the premises owned by the employer the benefit is tax free even for 2% shareholders and partners. However, a membership at a fitness center such as Gold s Gym or LA Fitness is taxable compensation. b. The following are considered employees for this benefit: iv. A current employee v. A former employee who has retired or left on disability 17

18 vi. A widow of an employee vii. A widow of a former employee who retired or left on disability viii. A leased employee ix. A partner who performs services for the partnership x. A 2% shareholder of an S-Corporation 3. Working Condition Fringe Benefits IRC 132(d) a. Property or services provided so that an employee can perform his or her job and could have deducted the cost of the property or service as a business expense if he or she had paid for it instead of the employer. b. Cell phones provided by an employer may be excluded from taxable income if there are substantial business reasons to provide cell phones to the employees. Reasons include the need to be able to contact employees for work related emergencies, the need for employees to be able to take client calls when they are away from the office or in other time zones that may be outside of normal business hours. c. The following are considered employees for purposes of this benefit: i. A current employee ii. Board of directors of the company iii. Independent contractors iv. volunteers v. A partner who performs services for the partnership vi. A 2% shareholder of an S-Corporation d. In order to be excludible as a working condition fringe benefit all the following must apply: i. The expense must be related to the business ii. The expense must be deductible on the employee s tax return if it had been paid for by the employee iii. The business use must be substantiated 4. Tuition Reduction IRC 117(d) a. A qualified educational institution can exclude up to $5,250 from income for free tuition for undergraduate education, if the funds are paid directly to the educational institution. b. Graduate education can only be excluded for anyone who also performs teaching or research activities for the educational institution. 18

19 5. Flexible Spending Arrangements (FSA) IRC 125 Flexible Spending Arrangements (FSA s) allow employees to choose which benefit they would like to take advantage of and exclude from income and to be used for medical or dependent care expenses. A Flexible Spending Arrangement can be funded by salary reduction, employer contributions or a combination of both. a. Employees must be covered by an employer sponsored group health plan b. The employer must have a written cafeteria plan c. Employees may be able to choose between qualified non-taxable benefits or taxable cash d. Employees may set aside upt to $2,500 for 2014 and up to $2,550 for 2015 for a medical Flexible Spending Account. e. The limit for Dependent Care Expenses is $5,000 if married filing jointly and $2,500 if married filing separately. f. The employer may also contribute up to $2,500 g. Beginning with tax years starting after 2012 the employer may adopt a $500 carryover provision which allows the employees to carry $500 over to the next year for expenses incurred in that next year. This does not reduce the available salary deduction for the following year. However, if the $500 rule has been established a grace period will not be allowed. h. In lieu of the $500 rule the plan may have a grace period which permits any unused funds to be used by March 15 of the following year for expenses incurred in the prior year i. Distributions can only be used for qualified medical expenses. Qualifying medical expenses are those that would qualify to be deducted on Schedule A. The taxpayer then must reduce any medical expenses by the amount reimbursed by the Flexible Spending Account. j. Employees are allowed to withdraw the entire pre-tax amount before they have fully funded the FSA with salary reductions. Example: the employee incurs $2,000 of medical expenses in February and gets reimbursed the entire $2,000 even though only $416 has been deducted from wages. In this case the employer takes on the risk if the employee quits before the end of the year. 19

20 Wellness Programs For your reference only Internal Revenue Bulletin: This document contains final regulations, consistent with the Affordable Care Act, regarding nondiscriminatory wellness programs in group health coverage. Specifically, these final regulations increase the maximum permissible reward under a health-contingent wellness program offered in connection with a group health plan (and any related health insurance coverage) from 20 percent to 30 percent of the cost of coverage. The final regulations further increase the maximum permissible reward to 50 percent for wellness programs designed to prevent or reduce tobacco use. These regulations also include other clarifications regarding the reasonable design of health-contingent wellness programs and the reasonable alternatives they must offer in order to avoid prohibited discrimination. PwC's Insights,New guidance on employer-provided wellness programs,(may 12, 2015) In brief The Equal Employment Opportunity Commission (EEOC) released proposed rules in April that would modify regulations and other guidance on employer wellness programs under the Americans with Disabilities Act (ADA). Comments on the proposed rules must be submitted to EEOC by June 19. In addition, the agencies responsible for Affordable Care Act (ACA) guidance (the Departments of Treasury, Labor and Health and Human Services the tri-agencies ) released a new set of FAQs interpreting 2013 final regulations on employer-provided wellness programs under ACA. The FAQs address what it means to be a health-contingent wellness program that is reasonably designed' to promote health or prevent disease, and clarify that a wellness program's compliance with the 2013 final regulations under ACA does not determine the wellness program's compliance with other laws such as the ADA, COBRA, or HIPAA privacy and security standards. In detail Background Employers offering health coverage to their employees often offer wellness programs to improve population health. These programs often use risk assessments or biometric screenings to identify health risk factors such as body mass index, cholesterol levels and blood pressure among others. Financial or other incentives are offered to employees to participate or achieve targeted healthrelated outcomes. Such programs are subject to regulation by the EEOC under the ADA, and, where they are part of a group health plan, by the tri-agencies under HIPAA and ACA. The Americans with Disabilities Act or ADA prohibits employers from making disability-related inquiries of employees or requiring them to submit to medical exams, unless such inquiries or exams are part of a voluntary wellness program. The EEOC has in the past few years focused enforcement efforts against companies alleging that wellness programs are involuntary in violation of the ADA. In addition, various pieces of EEOC guidance have suggested that certain monetary incentives or penalties may render a program involuntary. 20

21 Existing regulations under HIPAA and ACA Existing regulations, first effective in 2014, allow wellness programs linked to group health plans to offer financial incentives or rewards, such as premium discounts, rebates or avoidance of a surcharge, if certain conditions are satisfied. These existing regulations are issued under HIPAA and ACA, aimed at preventing discrimination in health coverage based on health status. To assess whether a particular wellness program satisfies applicable HIPAA nondiscrimination standards, the ACA regulations classify wellness programs as participatory and health-contingent. Participatory wellness programs offer financial rewards to all similarly situated participants regardless of health status or outcome (e.g., fitness club memberships, attendance at health seminars, smoking cessation, completion of a health risk assessment or other diagnostic screening, etc.). Plan sponsors have wide discretion in designing participatory wellness programs. Health-contingent wellness programs require participants to achieve specified health-related standards or outcomes, or complete a specified activity, in order to receive the financial reward. Under the ACA regulations, health-contingent wellness programs must meet more stringent requirements including participant disclosures, the frequency with which individuals are given the opportunity to earn the reward, limitations on the amount of the reward, availability to all similarly situated individuals, and waivers or other accommodations for employees who cannot participate in the program. Health-contingent wellness programs must also be reasonably designed to promote health or prevent disease that is, the program must have a reasonable chance of improving health or preventing disease without being overly burdensome. EEOC proposed rules under ADA Wellness programs can be offered outside of a health plan, or they can be related to an employer's insured or self-insured group health plan. Regulations proposed by the EEOC on April 20 describe how ADA applies to wellness programs that are part of an employer's group health plan. The rules will help employers determine how they can conduct health assessments as part of their group health plans in compliance with the ADA, which otherwise restricts the circumstances under which employers may ask employees about their health or require them to undergo medical examinations. Limit on incentive or penalty The proposed rules clarify that wellness programs are allowed under ADA, and where the program is related to the employer's group health plan, may offer incentives or penalties of up to 30% of the total cost of employee-only health coverage to encourage participation. However, wellness programs can't be used to discriminate based on disability. New disclosure requirements The ADA proposed rules require employers to make certain new disclosures to employees (including what information will be collected, with whom it will be shared, and how it will be used and kept confidential). Reasonable alternative accommodation must also be offered for disabled persons to earn the incentive offered under the program. 21

22 Program must be voluntary The proposed rule requires wellness programs to be voluntary. Employees can't be required to participate; and employees who refuse to participate can't be disciplined, refused health coverage, or retaliated against in any way. The EEOC is specifically requesting comments on whether it should propose further protections for low-income employees. Additional requirements The proposed rule requires that if information about an employee's health or medical exams is requested (for example questions on a health risk assessment), the program must be reasonably likely to promote health or prevent disease. Such information must be kept confidential in accordance with ADA standards, and the disclosure to employers of medical information collected as part of a wellness program must be limited to aggregate information that doesn't reveal an employee's identity. EEOC also published a Fact Sheet for Small Businesses and a Question and Answer document in connection with the proposed rules. Observation Similar to the ACA regulation, the proposed ADA regulations clarify that incentives may be in the form of either an award or a penalty. However, the proposed limit on incentives at 30% of the cost of selfonly coverage is not the same as the HIPAA nondiscrimination limits (as modified by the tri-agencies' 2013 final ACA regulations). The ACA regulations allow incentives up to 30% of the cost of coverage (which could be the cost of family coverage where dependents are enrolled and eligible to participate in the wellness program), or up to 50% for tobacco-related wellness programs. The EEOC is specifically requesting comment on the practical effects of these different limits. If finalized as proposed, the EEOC's 30% limit could require the revamping of some existing wellness incentive program designs. New wellness program FAQs under ACA FAQs about Affordable Care Act Implementation (Part XXV) address several wellness program-related concerns raised since the tri-agencies' release of the 2013 final regulations. The FAQs first provide guidance on what it means for a health-contingent wellness program to be reasonably designed to promote health or prevent disease. Rather than proscribing a specific formula for making this determination, the FAQs base the evaluation on all relevant facts and circumstances so as to allow for experimentation and development of innovative methods for promoting wellness. Programs are not required to be accredited or based on specific evidence-based clinical standards or practices; however, programs based on practices such as those found in the Guide to Community Preventive Services or the US Preventive Service Task Force's Guide to Clinical Preventive Services are encouraged. The FAQs reiterate the accommodation specified in the 2013 final regulations requiring a reasonable alternative standard to qualify for rewards for individuals who don't meet standards based on health factors. The FAQs also indicate that programs designed to dissuade or discourage enrollment by 22

23 individuals who are sick or may have high health claims will not be considered reasonably designed. Similarly, programs that collect substantial sensitive personal information without helping individuals make healthy behavioral choices won't satisfy the requirement that the program have a reasonable chance of improving a participant's health or preventing disease; and programs with unreasonable time or travel commitments may be considered overly burdensome, and will be scrutinized by the agencies. The second FAQ confirms that compliance with the agencies' 2013 final regulations on wellness programs (and related guidance, such as FAQs) under ACA doesn't necessarily mean a program also complies with other state or federal laws, such as COBRA health coverage continuation rights, the Americans with Disabilities Act, or other reporting or disclosure obligations arising under the Code, ERISA or other labor and employment laws. Nor does such compliance determine the tax treatment of incentives or rewards earned under the program. For example, while fitness club fees may be reimbursed under a wellness program, the reimbursements will generally be includible in employees' wages. Privacy and security standards An additional FAQ from the Department of Health and Human Services confirms that individually indentifiable health information obtained through a wellness program that is part of a group health plan is protected health information (PHI), and is subject to the privacy, security and breach notification standards of HIPAA. These rules limit the circumstances under which an employer in its capacity as sponsor of a group health plan may access PHI without written authorization of the individual. Employers are also often involved in health plan administration. This may include administration of the health plan's wellness program benefits. In such cases, unless the individual provides a written authorization to disclose the information, the group health plan may provide the employer access to PHI necessary to perform its plan administration functions only if the employer (as plan sponsor) amends the plan documents and certifies to the group health plan that it agrees to establish adequate separation between employees who perform plan administration functions and those who don't; not use or disclose PHI for employment-related actions or other purposes not permitted by the HIPAA's privacy standards; if electronic-phi is involved, the employer will implement reasonable and appropriate administrative, technical, and physical safeguards to protect the information; and report any unauthorized use or disclosure to the group health plan. The takeaway Employers that offer wellness programs in connection with their group health plans, and advisors that help design or administer wellness programs, should review both the new ACA implementation FAQs and the EEOC's proposed rules on compliance with the ADA. The consistencies between the ACA and ADA wellness program rules will be welcome news. Comments on the proposed ADA rules should be submitted to EEOC by June

24 Working Condition Educational Fringe Benefit -General Guide Is the education needed to meet the minimum educational requirements of your business? No Is the education part of a study program that can qualify for a new trade or business? Yes Yes Your educational reimbursement is taxable No Is the education required by your employer, or by law, to keep your present salary, status or job? No Does the education maintain or improve skills required in doing your present work? Yes Yes Your educational reimbursement is not taxable. No Qualified Educational Assistance (Section 127) Up to $5,250 paid or incurred on behalf of an employer under an educational assistance plan are excludable from the wages of each employee, if certain requirements are met. Education may be at undergraduate or graduate level. The education is not required to be job-related. IRC 127 The following requirements apply for a qualified educational assistance plan: The employer must have a written plan and may not offer other benefits that can be selected instead of education

25 Comparison of Code Sections Covering Educational Assistance The following table is for quick reference. For more information, see the text, the relevant Internal Revenue Code sections, or Publication 970. Feature 127 Qualified Educational Assistance 132(d) Working Condition Fringe 117(d) Qualified Tuition Reduction Written Plan Required Yes No No Undergraduate Courses Covered Yes Yes Yes Graduate Courses Covered Yes Yes No* Must Be Job-Related No Yes No Courses Qualifying Employee for New Trade or Yes No Yes Business Covered Courses Needed to Meet Minimum Job Yes No Yes Requirements Covered Can Discriminate in Favor of Highly Compensated No Yes No Employees Dollar Limitation $5,250 No No Expiration date None None None Definition of Employee Includes: Current Employees Yes Yes Yes Family Members No No Yes Laid-Off Employees Yes No No Employees Retired or on Disability Yes No Yes Independent Contractors No Yes No Educational Expenses Covered: Tuition Yes Yes Yes Books, Supplies, Equipment Yes Yes No Tools or Supplies employee may keep No No No Education Involving Sports, Games, Hobbies No** No** Yes Meals, Lodging or Transportation No Yes No * See text for exceptions ** Yes, if specifically job related Note: These are general rules. For details, refer to the text and Publication 970.

26 Form W-2 Reporting As discussed above, payments made under an accountable plan may be excluded from the employee s gross income and are not reported on Form W-2. However, cash advances, allowances, and reimbursements that do not fall under the accountable plan rules become wages subject to the reporting rules. If the employer pays a per diem or mileage allowance and the amount paid exceeds the amount the employee substantiated under IRS rules, you must report the excess as wages on Form W-2. The excess amount is subject to income tax withholding and social security and Medicare taxes. Report the amount substantiated (i.e., the nontaxable portion) in box 12 using code L. (See the Instructions for Forms W-2 and W-3.) TYPE OF REIMBURSEMENT EMPLOYER W-2 REPORTING* Under an Accountable Plan Actual expense reimbursement: No amount reported Excess returned Actual expense reimbursement: Excess not returned Per diem or mileage allowance up to the Federal rate: The excess amount is reported as wages in Boxes 1, 3, and 5. Taxes withheld are reported in Boxes 2, 4, and 6. No amount reported Excess returned Per diem or mileage allowance up to the Federal rate: Excess not returned Per diem or mileage allowance exceeds the Federal rate: Excess reimbursement over Federal rate not returned Either adequate accounting or return of excess, or both, not required by plan NO REIMBURSEMENT PLAN Under a Nonaccountable Plan The excess amount is reported as wages in Boxes 1, 3 and 5. Taxes withheld are reported in Boxes 2, 4, and 6. The amount up to the Federal rate is reported only in Box 12, Code L - it is not reported in Boxes 1, 3, and 5. The excess amount is reported as wages in Boxes 1, 3 and 5. Taxes withheld are reported in Boxes 2, 4, and 6. The amount up to the Federal rate is reported only in Box 12, Code L - it is not reported in Boxes 1, 3 and 5. The entire amount reported as wages in Boxes 1, 3 and 5. Taxes withheld are reported in Boxes 2, 4, and 6. The entire amount reported as wages in Boxes 1, 3 and 5. Taxes withheld are reported in Boxes 2, 4, and 6. Note: This chart below refers to the 2013 Form W-2. If you are considering another year, check The instructions for that year. The box numbers and codes are subject to change