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Health, Accident, and Retirement Benefits


Health, Accident, and Retirement Benefits February 20, 2010 Sharon Goldsand, CPA, CPP Payroll Manager 815-754-6548 Types of Benefits ... – PowerPoint PPT presentation

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Title: Health, Accident, and Retirement Benefits

Health, Accident, and Retirement Benefits
  • February 20, 2010
  • Sharon Goldsand, CPA, CPP
  • Payroll Manager
  • 815-754-6548

Types of Benefits Offered by Most Employers
  • Health Insurance
  • Sick Pay
  • Workers Compensation Insurance
  • Retirement and Deferred Compensation Plans

Health Insurance
  • Traditional Health Insurance Plans
  • Health Maintenance Organizations (HMOs)
  • Preferred Provider Organizations (PPOs)

Tax Treatment of Accident and Health Insurance
  • Non-Taxable Contributions
  • Contributions made by an employer
  • Contributions made under a Section 125 Cafeteria
  • If employer reduces salary and then reimburses
    premium to employee, then the premium is taxable
    to the employee
  • Premiums must be for Employee, Spouse, Dependents
    (on 1040)
  • For purposes of this provision dependent will
    continue to apply to a person who is receiving
    more than ½ his/her support from the taxpayer
    even if he/she earnings more than the annual

Tax Treatment of Accident and Health Insurance
  • Premiums for life partners are federal taxable
    unless recognized as a spouse under state law.
    If the employees domestic partner is of the same
    sex as the employee, the partner does not qualify
    as the employees spouse for federal tax purposes
    regardless of the state law. The partner may
    qualify as a dependent if partner receives more
    that ½ support from employee, lives with
    employee, and the relationship does not violate
    local law.

Tax Treatment of Accident and Health Insurance
  • What Taxes are Involved
  • Federal Income Tax
  • Employment Taxes
  • Social Security
  • Medicare
  • FUTA
  • Illinois follows the federal government some
    state and local jurisdictions do not.

Tax Treatment of Accident and Health Insurance
  • In Order to exclude from employment taxes (Social
    Security, Medicare and FUTA)
  • Must be under a plan based on one of the
  • Plan is written
  • Referred to in employment contract
  • Employees contribute to the plan
  • Employer contributions are made to a separate
  • Employer is required to contribute

Tax Treatment of Accident Health Insurance
  • Benefits received directly or indirectly
    reimbursing the employee for medical expenses
    incurred are not included in employees income
  • Any reimbursements in excess of actual expenses
    are taxable income to the employee
  • Payments for loss of limb or disfigurement as
    part of ADD are not included in income (payments
    must not be related to time lost from work).

Nondiscrimination Requirements for Health
  • If insurance is provided through third party
    insurance company there is no requirement.
  • If employer is self-insured (reimbursing
    employees medical expenses from its own funds),
    employer may not discriminate in favor of highly
    compensated employees in either benefits or
  • IRS Code Section 105(h)

Discriminatory Plan
  • Amounts paid to highly compensated employees must
    be included in taxable income
  • Who is Highly Compensated
  • 5 highest-paid officers
  • Owner of more than 10 of employers stock
  • Top-paid 25 of employees

Discriminatory Plan
  • Although discriminatory reimbursements are
    taxable to the highly compensated employees
    receiving them, they are not subject to federal
    income tax withholding or employment taxes.

Long Term Care Insurance
  • Treated as accident and health insurance under
    Health Insurance Portability and Accountability
    Act of 1996
  • Employer provided coverage is excluded from
  • Benefits are excluded from income
  • If per diem excludible limit is 290/day in
    2009 (indexed for inflation)
  • Excess will be excluded to the extent of actual
    cost of care

Long Term Care Insurance
  • Restrictions
  • Not subject to COBRA
  • Cannot be part of Cafeteria Plan
  • If part of flexible spending arrangement it is
    included in employees 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

COBRA Qualifying event period of coverage
  • Death of covered employee 36 months
  • Covered employees termination of employment or
    reduction in work hours (other than gross
    misconduct) 18 months
  • If the reason for absence is employees military
    service 24 months
  • If another qualifying event occurs (other than
    employers bankruptcy) period extends to 36
  • Qualified beneficiary (employee or dependent) is
    disabled under Social Security Act during the
    first 60 days of continued coverage - 29 months
  • Another qualifying event during 29 months (other
    than employer bankruptcy) extends coverage to 36

COBRA Qualifying event period of coverage
  • Employers bankruptcy
  • Coverage is life of retiree or retirees spouse.
  • Once retiree dies 36 months for retirees
    spouse and children from date of retirees 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

  • Election and notice provisions
  • Election period must last at least 60 days from
    the date when coverage was terminated or the
    qualified beneficiary receives notice which
    ever is later.
  • Plan must provide written notice of COBRA
    continuation coverage when coverage begins
  • Employee or Employer must notify plan
    administrator of qualifying event, responsibility
    and timing depends on the event
  • Once aware of the qualifying event, plan
    administrator has 14 days to notify qualified
    beneficiaries of their rights.

  • Penalties for Noncompliance
  • Employers subject to 100 per day penalty for
    each qualified beneficiary (maximum 200 per day
    per family affected by same qualifying event).
  • Penalty will not be imposed if failure is due to
    reasonable cause and is corrected within 30 days
    of discovery
  • Unintentional failures due to reasonable cause
    maximum penalty is lesser of 10 of employer
    premiums for group health plans during preceding
    taxable year to 500,000

Savings Plans and Reimbursement Accounts for
Medical Expenses
  • Archer MSA (Medical Savings Accounts)
  • Health Reimbursement Arrangements (HRA)
  • Health Savings Accounts (HSA)

Medical Savings Accounts (Archer MSA)
  • Established by Health Insurance Portability and
    Accountability Act (HIPA) of 1996
  • Small Employers (no more than 50 employees).
    Eligibility can continue for all employees until
    the year after the employer has 200 employees.
    At that point only employees currently enrolled
    can continue to contribute
  • Employee must be covered only by high deductible
    health insurance plan.
  • For 2009 annual deductible 2,000 3,000 for
    individual 4,000 - 6,050 for family.
  • Maximum out-of-pocket expenses can be no more
    than 4,000 for individual coverage and 7,350
    for family coverage.
  • Cannot be part of Cafeteria Plan

Tax Treatment of Archer MSA
  • Contributions can be made by employer or employee
    (not both)
  • Employee contributions are deductible from income
    on personal tax return.
  • They are subject to federal income tax
    withholding and employment taxes.
  • Employer contributions are excludable from income.

Limitations on Contributions to Archer MSA
  • Employee deduction cannot exceed employees
  • Deduction or Contribution is limited to 65 of
    the plan deductible for individual coverage or
    75 of the plan deductible for family coverage.
  • Employer contributions must be the same amount
    for each employee based on either dollar amount
    or percentage of applicable deductible.
  • Employer contributions in excess are included in

Archer MSA Tax Treatment of Distributions
  • Distributions from MSAs are excluded from income
    if they are for medical expenses incurred by
    employee or his/her dependents.
  • Person for whom expenses are incurred must be
    covered only by high deductible health plan.
  • Distributions included in income are subject to
    an additional 15 tax unless made after age 65,
    disability, or death.
  • MSA Trustee or Custodian is not required to
    determine use of distributions this is the
    responsibility of the account holder.

Archer MSA Information Reporting Requirements
  • Employer Contributions
  • Box 12 R on W-2
  • Plan trustees report on 5498-MSA
  • Reported on employees 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-MSA
  • Distributions
  • Plan trustees report on 1099-MSA

Health Reimbursement Arrangements (HRA)
  • Paid solely by employer (not salary reduction
    election or cafeteria plan)
  • Not limited by number of employees or only to
    employees who have High Deductible health plans.
  • Reimburses employee for medical care expenses
    for employee, spouse dependents.
  • Reimbursements up to maximum dollar amount with
    unused portion carried forward to subsequent
    coverage periods.

  • Benefits under HRA generally excluded from
    employees 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

  • Qualifications for exclusion
  • No person may have right to receive cash or any
    benefit other than reimbursement of medical care
  • 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).

  • Qualifications for exclusion
  • Arrangements formally outside HRA that provide
    for adjustment of employees compensation will be
    considered in determining eligibility for
  • 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.

  • Qualifications for exclusion
  • Reimbursements can be to former employees and
    retirees up to the unused balance.
  • Employer may reduce maximum balance after
    retirement or termination for any administrative
    costs of continuing coverage.
  • Employer may or may not provide an increase in
    amount available after an employee retires or
    terminates employment.
  • If HRA allows payment of medical benefits to
    designated beneficiary other than the employees
    spouse or dependents payments are not excludable
    from income effective 8/14/06 (delayed until
    2009 for HRA provisions created before 8/14/06)

  • 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
  • If correlation between maximum reimbursement
    amount available and amount of salary reduction
    election for accident and health plan then
    reduction is attributable to HRA

  • HRAs and Flexible Spending Accounts (FSAs)
  • Amount credited to HRA must not be directly or
    indirectly based on amount forfeited under FSA
  • If medical expenses are reimbursable under HRA
    and FSA, HRA must be exhausted before FSA
  • Before FSA plan year begins, the plan document
    can specify coverage under HRA is available only
    after amount under FSA has been exhausted. In no
    case can HRA and FSA reimburse the same medical
    care expenses.

  • Nondiscrimination rules applicable to HRAs
  • Section 105(h) same as for self-insured medical
    reimbursement plans
  • HRA is subject to COBRA
  • If individual elects COBRA continuation coverage
    HRA must provide for continuation of maximum
    reimbursement with increase at same time and same
    increment as similarly situated non-COBRA
  • Plan can provide for continued reimbursement
    regardless of election of continuation coverage
    (not mandatory)
  • No Reporting Requirement for HRA.

Health Savings Accounts (HSA)
  • Created by the Medicare Prescription Drug
    Improvement and Modernization Act of 2003
  • Effective for Taxable years beginning after
  • 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

  • Qualifications for exclusion
  • Individuals must be only in high deductible
    health plan (HDHP)
  • Annual deductible for 2009 must be at least
    1,150 for individual coverage and 2,300 for
    family coverage with out of pocket expense limits
    no more than 5,800 for individual coverage and
    11,600 for family coverage.
  • If family coverage, no amounts are payable from
    HDHP until the family has incurred medical
    expenses in excess of minimum annual deductible.
  • An HDHP can have a smaller deductible or none at
    all for preventive care.

  • Qualifications for exclusion contd
  • 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
  • There is a 6 excise tax for excess individual
    and employer contributions in addition to all
    federal taxes.

  • Contributions
  • Maximum annual contribution is the lesser of
  • 100 of annual deductible
  • Maximum deductible permitted same as Archer MSA
  • For 2009 maximum is 3,000 for an individual and
    5,950 for a family
  • Catch up is allowed for individuals at least 55
    years old on the last day of the tax year.
  • For 2009 and beyond 1,000

  • Contributions
  • No contributions can be made once the individual
    is eligible or Medicare (65 years old).
  • Amounts can be rolled over from an Archer MSA and
    IRA, or another HSA
  • Employer contributions must be the same for
    everyone with comparable coverage either at the
    same amount or percent of deductible
  • Comparability is applied separately to part-time
    workers (normally less than 39 hours per week).

  • HSA and HDHP can be included in a Cafeteria Plan
  • HSAs are not subject to COBRA continuation

  • Distributions
  • Excluded from gross income if for qualified
    medical expenses of employee, spouse or
  • If not used for qualified medical expenses then
    it is included in gross income and subject to
    additional 10 tax unless after death,
    disability, or the employee reaches 65 years old.

  • 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

  • Distributions
  • Employers are not required to determine whether
    HSA distributions are used for qualified medical
    expenses. Employee makes determinations and must
    maintain records to substantiate.
  • Employers can provide eligible individuals with
    debit, credit or stored-value cards same
    guidance as under HRAs

HSA Reporting Requirements
  • Employer contributions and salary reductions
    contributions (pre-tax deductions)
  • Box 12W 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
  • Box 1, 3, and 5 on W-2
  • Employee can deduct up to the annual limit on
    personal tax return

Sick Pay
  • Paid by employer from regular payroll account
  • Taxable as regular income
  • Separate plan (STD, LTD)
  • Premiums paid by employee on after tax basis
    benefits are not taxable
  • Premiums paid by employer or on pre-tax basis
    benefits are fully taxable.
  • Premiums paid by employer and employee
    (after-tax) portion of benefits attributable to
    employer-funded portion is taxable.

Sick Pay
  • Responsibility for income withholding and
    employment taxes
  • Employer pays and is self-insured
  • Employer withholds taxes based on employees 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
  • If employee returns to work, new six-month period
    begins if employee is later on disability

Sick Pay
  • Responsibility for income withholding and
    employment taxes
  • Payments made by employers agent employer is
    self insured.
  • Agent may withhold FIT at 25 in 2009
  • Employer retains responsibility for Social
    Security, Medicare, and FUTA unless agreement
    with agent to take on this responsibility.

Sick Pay
  • Responsibility for income withholding and
    employment taxes
  • Payments are made by an insurance company who
    receives premiums for disability coverage.
  • Third party not required to withhold FIT from
    payments unless requested by disabled employee
  • IRS allows for fixed amount or percentage (W-4S
    has no provision for percentage)
  • Third party withholds and remits Social Security
    and Medicare taxes or advises employer who pays
    the taxes and includes in 941.

Sick Pay
  • Permanent Disability benefits
  • Payments subject to income tax to extent premiums
    were paid by employer or with pre-tax dollars
  • Payments are not subject to Social Security,
    Medicare, or FUTA

Workers Compensation Insurance
  • Form of insurance employers are required to buy
    to insulate them from lawsuits brought by
    employees who are hurt or become ill while
  • Benefit payments not included in gross income
    or subject to any employment taxes
  • Premium payments paid by employer based on
    specific earnings and classifications.

Retirement and Deferred Compensation Plans
  • Qualified Pension and Profit Sharing Plans IRC
  • Cash or Deferred Arrangements IRC 401(k)
  • Tax-Sheltered Annuities IRC 403(b)
  • Deferred Compensation Plans for Public Sector and
    Tax-Exempt Groups IRC 457
  • Employee-Funded Plans IRC 501(c)(18)(D)
  • Individual Retirement Accounts (IRA)

Retirement and Deferred Compensation Plans
  • Simplified Employee Pensions IRC 408(k)
  • Savings Incentive Match Plans for Employees of
    Small Employers (SIMPLE Plans)
  • Employee Stock Ownership Plans
  • Nonqualified Deferred Compensation Plans

Qualified Pension and Profit Sharing Plans 401 (a)
  • Defined Benefit Plans
  • Benefit to employee based on age, compensation
    level and length of service
  • Defined Contribution Plans
  • Account for each employee, with set amount being
    contributed. Employees retirement benefit
    depends on the amount of money in the account at

Qualified Pension and Profit Sharing Plans 401 (a)
  • Defined Contribution Plans
  • Money Purchase Pension Plan - Employer makes
    contributions each year based on employees
  • Profit Sharing Plan Employer contributions are
    substantial and recurring, although they may be
    discretionary to some degree

Qualified Pension and Profit Sharing Plans 401 (a)
  • Annual Compensation and Contribution Limits
  • Set by Economic Growth and Tax Relief
    Reconciliation Act of 2001 (EGTRRA)
  • For 2009 annual compensation limit is 245,000
    (indexed annually to the next lowest multiple of
  • Annual contributions and other additions to
    defined contribution plans is limited under IRC
    415 to the lesser of 49,000 in 2009 (indexed
    annually) or 100 of employees annual
  • Pre-tax elective deferrals to 401(k), 403(b),
    457, 125, 132(f)(4) are included in employees
    contribution to determine the limit.

Qualified Pension and Profit Sharing Plans 401 (a)
  • Tax Treatment of Pension and Profit Sharing Plans
  • Qualified Plan meets certain requirements under
    IRC 401(a) regarding participation, vesting,
    contribution limits, benefit limits, and
    nondiscrimination in favor of highly compensated
  • Employer contributions are excluded from wages
    and are not subject to federal income tax
    withholding, or Employment taxes.
  • Employee after-tax contributions are included in
    income and taxable whether voluntary or required.

Qualified Pension and Profit Sharing Plans 401 (a)
  • State Tax Treatment of Pension Payments
  • 1996 Law (HR394) prohibits states from imposing
    income tax on the retirement income of

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
  • 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.

  • Contribution Limits for 401(k)
  • 2009 contribution limit is 16,500
  • Adjusted for inflation in 500 increments for
    future years
  • Tax Treatment of 401(k) contributions
  • Not taxable for Federal Income Tax (an most
  • Taxable for Employment Taxes
  • Reporting for 401(k) contributions on W-2
  • Not in box 1, but in boxes 3 5
  • In box 12 with a D
  • Retirement box is checked in there were any
    deductions in the tax year.

  • Catch-up contribution began in 2002
  • Under EGTRRA Applies to plans 401(k), 403(b),
    SEP, Simple, and 457 plans
  • Employee must be at least 50 years old in the
    current year
  • Limits of catch-up for all but SIMPLE
  • 2009 catch-up limit is 5,500
  • Limit will be adjusted for inflation in 500
    increments for future years
  • SIMPLE catch-up limit is 2,500 in 2009. Limit
    will be adjusted for inflation in 500 increments
    for future years.

  • Non Discrimination Testing
  • Must not discriminate in favor of highly
    compensated employees
  • 5 owner of stock or capital
  • Annual compensation over 110,000 (2009) or top
    paid 20 of employees
  • Other Contributions can be included
  • Catch-up Contributions are not counted.
  • At least 70 of non-highly compensated employees
    must be eligible or the of non-highly
    compensated eligible employees is at least 70 of
    the percentage of eligible highly compensated

  • Non Discrimination Testing
  • Other ways to meet non-discrimination testing
  • Employer matches 100 of elective deferrals for
    not highly compensative employees up to 3 and
    50 up to 5
  • Employer is required to contribute at least 3 of
    salary for non highly compensated employees
    regardless of the employees participation in

  • 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.

  • Early Distribution Penalty
  • If employee receives a distribution before
    retirement (with exceptions) there is a 10
    excise tax on the taxable portion of the
  • 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
  • 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
  • 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.

Roth 401(k)
  • Reporting of Roth 401(k) on W-2
  • The amount contributed in boxes 1, 3 5.
  • The amount contributed in box 12 with AA

Tax-Shelter Annuities 403(b)
  • Who can offer
  • Public Schools, Tax Exempt Charitable, Religious,
    and Educational Organizations
  • Automatic salary reductions
  • Can qualify as elective deferrals
  • Newly hired employee, who does not make an
    election can have automatic 4 deductions toward
    purchase of annuity.
  • At hire employee must receive notice of auto
    election and right to elect to change the amount
    or opt out altogether.
  • Every year employee notified of reduction
    percentage and their right to change it,
    including procedure and timing for doing so.

  • Requirements
  • Annuity contract may not be purchased through a
    qualified annuity plan under Section 403(a)
  • Employees 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.

  • 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

  • Reporting on W-2
  • Contributions not in box 1 but in boxes 3 5.
    Contributions also show in box 12 with an E
  • Box 13 Retirement plan is checked if there are
    any contributions for the tax year
  • Catch-up special rule
  • For employees with as least 15 years of service
    with employer.

  • Catch-up special rule
  • Amount of catch-up limited to the lesser of
  • 3,000 additional contribution in any year (same
    as catch-up for those at least 50 years old)
  • 15,000 reduced by any amounts contributed under
    this special provision in previous years.
  • 5,000 x years of service less total elective
    deferrals from previous years.
  • If eligible for both special and over 50 catch-up
    cannot go over 5,500 first dollars considered
    under special rule.

Deferred Compensation Plans for Public Sector and
Tax-Exempt Groups (IRC 457)
  • Who can Offer
  • State and local government employers and
    tax-exempt organizations (other than churches)
  • Eligibility
  • Only individuals performing services for the
    employer are eligible (including independent
  • Nondiscrimination Testing
  • 457 plans can be discriminatory.
  • Deferral Limits
  • Same as 401(k)

IRC 457
  • 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
    participants deferrals for those years.
  • Cannot use both Catch-up and Special Rule

IRC 457
  • Rules
  • Funds and earnings in tax-exempt trust for
    exclusive benefit of employees and beneficiaries
  • Funds must be transferred within 15 business days
    after the month when would have been paid to
  • Deferrals and earnings remain assets of the
    employer subject to employers general creditors

IRC 457
  • Tax Treatment
  • Not subject to federal income tax withholding
  • Are subject to Social Security, Medicare, and
    FUTA as soon as there is no substantial risk of
    forfeiture of right to the benefit
  • Reporting
  • Not in Box 1 of W-2, but in Box 3 and 5 with
    Social Security and Medicare taxes in Boxes 4 and
    6 respectively and in Box 12 preceded by Code
  • Employer should not mark check box in Box 13
    Retirement plan based on 457 deferrals

IRC 457
  • Distributions Changes made by Economic Growth
    and Tax Relief Reconciliation Act (EGTRRA) of
  • No distributions before employee reaches age
    70-1/2, separation from employment (retirement)
    or the employee faces an unforeseeable emergency.
  • Plan may allow early distribution if total amount
    payable is no more than 5,000 and no amount has
    been deferred within 2 years of the distribution.
  • Distributions are considered pension
  • Entity distributing has responsibility for
    withholding and remitting income taxes

Individual Retirement Accounts (IRAs)
  • Employer sponsored IRA must be in writing and
    created for exclusive benefit of employees and
  • Contribution Limits
  • 2009 5,000
  • After 2009 adjusted for inflation to next
    multiple of 500

  • Catch-up Provision
  • Participant must be at least 50 by the end of the
  • Can deduct an additional 1,000 in years 2009 and

  • 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
  • For 2009 the reduction begins for married
    employees filing a joint return at 89,000
    single 55,000 married filing separately 00.
  • Employee not active participant (but spouse is)
    reduction starts at 166,000 for 2009 (married
    filing joint return)
  • Taxability for deduction totally eliminated at
    10,000 over the above limits (20,000 for joint
    filers beginning in 2007).

Roth IRA
  • Contributions
  • Established by Taxpayer Relief Act of 1997
  • Contributions are Taxable There are no
    phase-outs because of active plan participant
    status, but the amount allowed is reduced by an
    contributions by the individual to other IRAs for
    that year
  • For 2009 the amount that can be contributed is
    phased out once individuals adjusted gross
    income exceed 166,000 for joint filers or
    105,000 for single filers in 2008 (adjusted
    annually for inflation). Contributions are
    completely phased out at 176,000 for joint
    filers and 120,000 for single filers.

Roth IRA
  • Employers can allow direct deposit of
  • 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

Roth IRA
  • Distributions
  • Distributions are not included in gross income
  • If made no sooner than 5 years after first
    contribution and
  • Made on or after age 59-1/2, death, disability,
    or used for a first time home purchase.

Employee Stock Ownership (ESOP)
  • Defined Contribution Plan
  • Stock bonus plan or combined stock bonus and
    money plan designed to invest primarily in the
    employers 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.
  • Limit
  • 200p lesser of 49,000 or 100 of compensation.

Nonqualified Deferred Compensation Plans
  • Employer plan to defer compensation to a later
    date, which may or may not coincide with
  • Plan does not meet requirements of 401(a)
  • No limits
  • Can be discriminatory

Nonqualified Deferred Compensation Plans
  • Tax Treatment
  • The majority of these plans are unfunded
    employee has only employers promise the funds
    are not protected from the employers creditors
    or successors.
  • When unfunded, the amounts are not subject to
    federal income tax, but are subject to Social
    Security, Medicare, and FUTA.
  • When distributions are made later, the deferrals
    and the subsequent interest are subject to
    federal income tax, but not Social Security,
    Medicare, or FUTA

Nonqualified Deferred Compensation Plans
  • Requirements
  • Written plan
  • Employee has a legally binding right to
    compensation that has not been actually or
    constructively received and that is payable in a
    later year.

Nonqualified Deferred Compensation Plans
  • Reporting Requirements
  • Amounts deferred into unfunded plan are reported
    in Box 3 and 5
  • Such deferrals are reported in Box 11, but only
    if they are for prior year services.
  • Amounts distributed are reported in Box 1 only
  • The amounts should be reported in Box 11, if
    there were no deferrals in the year of

Family and Medical Leave Act (FMLA)
  • Guarantees employees (in workplaces with 50 or
    more employees) unpaid leave in a 12-month period
    for specific reasons.
  • Employer decides what constitutes a 12-month
    period. If employer fails to make decision clear,
    the 12-month period applied is the one most
    favorable to the employee.

FMLA Reasons for FMLA
  • 12 weeks in a 12 month period
  • To be with a newborn or newly adopted child
  • To take care of a seriously ill child, spouse, or
  • To care for themselves if they are seriously ill.
  • Any qualifying exigency (i.e. need) arising out
    of the fact that the employees spouse, son,
    daughter, or parent is a covered military member
    on active duty or has been notified of an
    impending call to active duty in support of a
    contingency operations.

FMLA Reasons for FMLA
  • 26 weeks in a single12 month period
  • To care for military service member with serious
    injury or illness suffered in the line of duty if
    the employee is the employee is spouse, son,
    daughter, parent, or next of kin of covered
    service member.
  • If employee does not take full 26 weeks remainder
    is forfeited.
  • No more than 26 weeks can be taken even if there
    is another reason during the 12 month period
    beginning on the first day the employee takes

FMLA - Eligibility
  • Has been employed by employer for at least 12
    months (not necessarily consecutively)
  • And has worked at least 1,250 hours within the
    previous 12-month period.
  • Exempt employees who have been employed one year
    are deemed to meet the hours worked requirement
    unless employer can prove otherwise (A part time
    exempt employee scheduled to work less than 24
    hours per week).

FMLA Paid vs. Unpaid Leave
  • Employers can require eligible employees to use
    any paid leave as part of guaranteed leave.
  • Employer must designate time off as paid or
    unpaid FMLA within 2 business days of receiving

FMLA Notice Requirement
  • Employee must give employer 30 days notice
  • If not foreseeable whatever notice is possible
    under the circumstances.
  • If foreseeable and not notified, employer can
    deny leave request for up to 30 days after notice
    is provided.

FMLA Notice Requirement
  • Employer must advise eligibility within 5 days of
    notice or when employer becomes aware that
    employee may qualify for FMLA
  • If employee is not eligible the employer must
    give at least one reason for the denial
  • Employer must provide separate notice as the same
    time of FMLA rights including
  • How 12 month period was determined
  • Certification Requirements
  • Requirement to take paid leave
  • Premium payment requirements for health benefits
  • Job Restoration rights including effect of key
    employee designation
  • Potential liability for health insurance premiums
    if employee does not return to work

FMLA Job Guarantee
  • Upon return employee is entitled to previous job
    or equivalent with no loss of pay or benefits.
  • Employee is not entitled to accrue any benefits
    or seniority during an unpaid FMLA leave
  • Any benefit increases or improvements not
    dependent on seniority must be made effective
    upon return
  • FMLA time must be treated as continuous service
    under pension and retirement plans for vesting
    and qualification purposes.

Intermittent FMLA
  • Several Days
  • Working reduced hours
  • If reduced hours, employer can deduct from exempt
    employees salary without converting employee to
    non-exempt under FLSA

FMLA Loophole and Recordkeeping
  • Coverage Loophole
  • The law requires employers to allow leave if
    there are 50 employees employed by the employer
    within 75 miles of the employees worksite when
    leave is requested.
  • Recordkeeping requirements
  • Basic payroll records regarding hours worked,
    rate of pay, deductions, details of dates and
    amounts of FMLA leave taken copies of notices
    and documents related to FMLA leave.

FMLA/Health Insurance
  • FMLA guarantees continuation of employees health
    benefits while on leave.
  • Employer can require employees premiums
  • Can be paid before, during or upon return
  • Pre-paid cannot be only option
  • Catch-up can be sole option only if it is the
    only option offered to employees on unpaid
    non-FMLA leave.
  • If during leave, payments are missed, the
    employee can be dropped after 30 days.
  • Notice must be provided to employee and 15 days
    allowed before coverage is dropped.

FMLA/Medical Flexible Spending Offered under
Cafeteria Plan
  • Employees must be allowed to
  • Continue coverage including health FSA while on
    FMLA leave
  • Revoke coverage or to continue coverage but
    discontinue paying premiums during the leave.
  • Reinstate health FSA coverage upon returning to
    work from unpaid FMLA leave
  • Employer can require reinstatement if required of
    employees on unpaid non-FMLA leave.

  • Qualifying event is deemed to occur on the last
    day of FMLA leave if employee terminates
    employment at the end of FMLA leave.
  • Maximum continuation coverage period is measured
    from that date or the date coverage is lost
    whichever is later.

FMLA Key Employees
  • Employer may deny reinstatement to key
    employees if necessary to prevent substantial
    and grievous economic injury to the employers
  • Key Employee
  • Salaried person among the highest 10 of all
    employees within 75 miles of the employees
  • Employee must be informed of possibility upon
    request and must be notified in writing (in
    person or certified mail) as soon as the
    determination is made within 5 days of request
    for leave.

Cafeteria Plans
  • Specific type of flexible benefit plan authorized
    by Section 125 of the Internal Revenue Code
  • Must contain at least one Taxable (cash) and one
    Non-Taxable (qualified) benefit.
  • Participation must be restricted to employees and
    must be maintained for their benefit.

Cafeteria Plans
  • Examples of Qualified Benefits
  • Accident and health insurance plans
  • Dependent care assistance
  • Group-term life insurance
  • Qualified adoption assistance

Cafeteria Plans
  • Funding
  • Flex Dollars or Flex Credits
  • Salary Reduction
  • Prohibition Deferred Compensation
  • Carry over unused contributions or benefits from
    one plan year to another.
  • Use contributions from one plan year to purchase
    benefits employer will provide in later plan

Cafeteria Plan Requirements
  • Written Permanent Plan
  • Description of benefits and period of coverage
  • Plans rules for eligibility
  • Procedures for elections
  • Manner in which contributions are made
  • Maximum amount of employer contributions
    available to any participant
  • Definition of plan year

Cafeteria Plans Qualifying Event
  • Change in status that allows employee to revoke
    or change an election during plan year
  • Marital status
  • Change in number of dependents
  • Employment status change employee or spouse
  • Change in dependent status
  • Residence change employee, spouse or dependent
  • Adoption

Cafeteria Plans Qualifying Event
  • Cost-driven change that allows change in election
    during plan year
  • Cost of qualified benefits increases or decreases
  • New benefit option
  • Dependent Care - cost change imposed by
    non-relative care provider
  • Spouse change different enrollment period or
    change in cost of benefits available to spouse

Cafeteria Plans Changes to 401(k) Elections
  • Cafeteria plan may permit an employee to change
    or revoke election deferrals to 401(k) plans or
    employee contributions governed by 401(m). The
    election revocation restrictions of Section 125
    to not apply to these plans.

Cafeteria Plans Non-Discrimination Testing
  • Non-discrimination Testing
  • Plan must not discriminate in terms of
    eligibility, contributions, or benefits in favor
    of highly compensated individuals, participants,
    or key employees.

Cafeteria Plans Non-Discrimination Testing
  • Non-discrimination Testing
  • Eligibility
  • Eligibility must not exceed 3 years
  • Length of service requirement must be the same
    for all employees
  • Contributions and benefits test
  • Each participant must have an equal opportunity
    to select non-taxable benefits
  • Highly compensated participants must not
    disproportionately select non-taxable benefits.

Tax Treatment of Cafeteria Plans
  • Employer contributions or pre-tax contributions
    are not subject to federal withholding or
    employment taxes to the extent that they are used
    to purchase non-taxable benefits.
  • After-tax contributions toward benefits are fully
    taxable the benefits purchased are excluded
    from employees income.
  • Cash if employee chooses cash, it is fully

Tax Treatment of Cafeteria Plans
  • Discriminatory plans
  • No negative tax consequences to non-key employees
  • Key employees have taxable income equal to the
    highest amount of taxable benefits they could
    have selected.

Flexible Spending Arrangements (FSAs)
  • Can be offered as part of a cafeteria plan
  • Coverage requirements
  • Specified expenses incurred by employees subject
    to maximums and other reasonable conditions.
  • Maximum reimbursement amounts cannot be more than
    five times the total premium for employees
    coverage (life, health, dental, vision).

Health Care FSA
  • Elections must be made before year begins
  • Cannot allow compensation to be deferred beyond
    the plan year or used for another benefit.
  • Excess premiums in health FSA that exceed all
    reimbursements of claims and administrative costs
    can be used to reduce employees required
    premiums as a dividend or premium refund. Must be
    allocated on uniform basis.
  • Starting in 2006 employers can allow a 2-1/2
    month grace period for employees to spend money
    in their FSA this will affect employees ability
    to elect HSA

Health Care FSA
  • Maximum amount of reimbursement selected by
    participant must be available at all times during
    the plan year.
  • Amount available is reduced by reimbursement
  • The premium payment schedule cannot be
    accelerated because of claims or employee
    separation from employment.

Health Care FSA
  • Reimbursements
  • Medical FSAs can only reimburse medical expenses
    incurred during coverage period cannot
    reimburse premiums
  • Medical expenses must be substantiated by third
    party and a statement from employee that the
    expense is not reimbursable under any other
    coverage is required.
  • Reimbursements can only be made for expenses
    actually incurred during period of coverage
    when medical care if provided.

Dependent Care FSA
  • Not subject to uniform coverage rule
    reimbursements are only made up to the amount
    already deducted.
  • Employees can be reimbursed up to 5,000 of
    dependent care expenses.
  • Employees must reduce any dependent care tax
    credit they receive dollar for dollar by any
    amounts contributed to Dependent FSA
  • Amount deducted for Dependent FSA goes in Box 10
    on the W-2

State Taxation
  • Starting on page 4-126 table of State
  • Illinois
  • Deferrals under Section 125 or 401 are not
    taxable for state income tax, though they are
    taxable for SUI
  • Deductions used to purchase medical or life
    insurance are not taxable for state income tax or