health, accident, and retirement benefits february 20, 2010 sharon goldsand, cpa, cpp payroll...
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Health, Accident, and Retirement Benefits
February 20, 2010Sharon Goldsand, CPA, CPPPayroll Manager815-754-6548Sharon.goldsand@Tegrant.com
Types of Benefits Offered by Most Employers
Health Insurance Sick Pay Worker’s Compensation Insurance Retirement and Deferred Compensation
Plans
Health Insurance
Traditional Health Insurance Plans Health Maintenance Organizations (HMOs) Preferred Provider Organizations (PPOs)
Tax Treatment of Accident and Health Insurance Contributions Non-Taxable Contributions
Contributions made by an employer Contributions made under a Section 125 Cafeteria Plan
If employer reduces salary and then reimburses premium to employee, then the premium is taxable to the employee
Premiums must be for Employee, Spouse, Dependents (on 1040) For purposes of this provision dependent will continue to
apply to a person who is receiving more than ½ his/her support from the taxpayer even if he/she earnings more than the annual exemption.
Tax Treatment of Accident and Health Insurance Contributions
Premiums for life partners are federal taxable unless recognized as a spouse under state law. If the employee’s domestic partner is of the same sex as the employee, the partner does not qualify as the employee’s spouse for federal tax purposes regardless of the state law. The partner may qualify as a dependent if partner receives more that ½ support from employee, lives with employee, and the relationship does not violate local law.
Tax Treatment of Accident and Health Insurance Contributions What Taxes are Involved Federal Income Tax
Employment Taxes Social Security Medicare FUTA
Illinois follows the federal government – some state and local jurisdictions do not.
Tax Treatment of Accident and Health Insurance Contributions In Order to exclude from employment taxes
(Social Security, Medicare and FUTA) Must be under a plan – based on one of the
following Plan is written Referred to in employment contract Employees contribute to the plan Employer contributions are made to a separate fund Employer is required to contribute
Tax Treatment of Accident Health Insurance Benefits Benefits received directly or indirectly reimbursing
the employee for medical expenses incurred are not included in employee’s income
Any reimbursements in excess of actual expenses are taxable income to the employee
Payments for loss of limb or disfigurement as part of AD&D are not included in income (payments must not be related to time lost from work).
Nondiscrimination Requirements for Health Insurance If insurance is provided through third party
insurance company there is no requirement. If employer is self-insured (reimbursing
employees’ medical expenses from its own funds), employer may not discriminate in favor of highly compensated employees in either benefits or eligibility. IRS Code Section 105(h)
Discriminatory Plan
Amounts paid to highly compensated employees must be included in taxable income Who is Highly Compensated
5 highest-paid officers Owner of more than 10% of employer’s stock Top-paid 25% of employees
Discriminatory Plan
Although discriminatory reimbursements are taxable to the highly compensated employees receiving them, they are not subject to federal income tax withholding or employment taxes.
Long Term Care Insurance
Treated as accident and health insurance under “Health Insurance Portability and Accountability Act of 1996” Employer provided coverage is excluded from
income Benefits are excluded from income
If per diem – excludible limit is $290/day in 2009 (indexed for inflation)
Excess will be excluded to the extent of actual cost of care
Long Term Care Insurance
Restrictions Not subject to COBRA Cannot be part of Cafeteria Plan If part of flexible spending arrangement it is
included in employee’s taxable income
Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) Requires health plan sponsors to provide
employees and their beneficiaries with the opportunity to elect continued group health coverage for a given period should their coverage be lost due to “qualifying event” Applies to employers with 20 or more employees
(FTEs) on typical business day. Coverage period generally is 18 to 36 months.
COBRA
Coverage same as provided to similarly situated beneficiaries who have not suffered the qualifying event. Employees who purchased health care coverage
under a cafeteria plan (including flexible spending) are eligible for COBRA continuation at level of coverage before event.
Long Term Care Insurance is not included in COBRA
COBRA Qualifying event – period of coverage Death of covered employee – 36 months Covered employee’s termination of employment or
reduction in work hours (other than gross misconduct) – 18 months If the reason for absence is employee’s military service –
24 months If another qualifying event occurs (other than employer’s
bankruptcy) period extends to 36 months. Qualified beneficiary (employee or dependent) is disabled
under Social Security Act during the first 60 days of continued coverage - 29 months Another qualifying event during 29 months (other than
employer bankruptcy) extends coverage to 36 months
COBRA Qualifying event – period of coverage Employer’s bankruptcy
Coverage is life of retiree or retiree’s spouse. Once retiree dies – 36 months for retiree’s spouse
and children from date of retiree’s death Divorce or separation of covered employee
(date of divorce is the qualifying event) – 36 months
Dependent child losing that status – 36 months
COBRA
Premium Requirements Can be up to 102% of the group premium paid for
similar coverage under the plan by the employer and employees. The maximum premium increases to 150% for disabled
qualified beneficiaries after the 18th month of continuation coverage.
Premium payment may not be required earlier than 45 days after the qualified beneficiary elects continuation of coverage
COBRA
Election and notice provisions Election period must last at least 60 days from the date
when coverage was terminated or the qualified beneficiary receives notice – which ever is later.
Plan must provide written notice of COBRA continuation coverage when coverage begins
Employee or Employer must notify plan administrator of qualifying event, responsibility and timing depends on the event
Once aware of the qualifying event, plan administrator has 14 days to notify qualified beneficiaries of their rights.
COBRA
Penalties for Noncompliance Employers subject to $100 per day penalty for
each qualified beneficiary (maximum $200 per day per family affected by same qualifying event). Penalty will not be imposed if failure is due to
reasonable cause and is corrected within 30 days of discovery
Unintentional failures due to reasonable cause – maximum penalty is lesser of 10% of employer premiums for group health plans during preceding taxable year to $500,000
Savings Plans and Reimbursement Accounts for Medical Expenses Archer MSA (Medical Savings Accounts)
Health Reimbursement Arrangements (HRA)
Health Savings Accounts (HSA)
Medical Savings Accounts (Archer MSA) Established by Health Insurance Portability and
Accountability Act (HIPA) of 1996 Small Employers (no more than 50 employees). Eligibility can
continue for all employees until the year after the employer has 200 employees. At that point only employees currently enrolled can continue to contribute Employee must be covered only by high deductible health insurance
plan. For 2009 annual deductible $2,000 – $3,000 for individual $4,000 -
$6,050 for family. Maximum out-of-pocket expenses can be no more than $4,000 for
individual coverage and $7,350 for family coverage. Cannot be part of Cafeteria Plan
Tax Treatment of Archer MSA Contributions can be made by employer or
employee (not both) Employee contributions are deductible from
income on personal tax return. They are subject to federal income tax withholding and
employment taxes. Employer contributions are excludable from
income.
Limitations on Contributions to Archer MSA Employee deduction cannot exceed employee’s
compensation Deduction or Contribution is limited to 65% of the
plan deductible for individual coverage or 75% of the plan deductible for family coverage.
Employer contributions must be the same amount for each employee based on either dollar amount or percentage of applicable deductible.
Employer contributions in excess are included in income.
Archer MSA – Tax Treatment of Distributions Distributions from MSAs are excluded from
income if they are for medical expenses incurred by employee or his/her dependents.
Person for whom expenses are incurred must be covered only by high deductible health plan.
Distributions included in income are subject to an additional 15% tax unless made after age 65, disability, or death.
MSA Trustee or Custodian is not required to determine use of distributions; this is the responsibility of the account holder.
Archer MSA – Information Reporting Requirements Employer Contributions
Box 12 R on W-2 Plan trustees report on 5498-MSA Reported on employee’s personal tax return
Employee Deductions Box 1, 3 and 5 on W-2 Employee takes deduction on personal income tax return
for amount contributed Plan trustees report on 5498-MSA
Distributions Plan trustees report on 1099-MSA
Health Reimbursement Arrangements (HRA) Paid solely by employer (not salary reduction
election or cafeteria plan) Not limited by number of employees or only to
employees who have High Deductible health plans. Reimburses employee for medical care expenses –
for employee, spouse & dependents. Reimbursements up to maximum dollar amount with
unused portion carried forward to subsequent coverage periods.
HRA
Benefits under HRA – generally excluded from employee’s gross income Qualifications for exclusion
May only reimburse expenses for medical care as defined in IRC section 213(d)
Expenses must be substantiated Expenses may not be for prior taxable year, incurred
before date the HRA began, or before employee enrolled in HRA
HRA
Qualifications for exclusion No person may have right to receive cash or any
benefit other than reimbursement of medical care expenses.
If any person has such a right currently or in an future year, all distributions to all persons under HRA in current year are included in gross income (even amounts paid to reimburse medical care expenses).
HRA
Qualifications for exclusion Arrangements formally outside HRA that provide
for adjustment of employee’s compensation will be considered in determining eligibility for exclusion. If bonus at retirement is related to HRA balance or
severance is paid only to employees who have HRA balance, then all reimbursements for all participants are disqualified.
HRA
Qualifications for exclusion Reimbursements can be to former employees and retirees
up to the unused balance. Employer may reduce maximum balance after retirement or
termination for any administrative costs of continuing coverage.
Employer may or may not provide an increase in amount available after an employee retires or terminates employment.
If HRA allows payment of medical benefits to designated beneficiary other than the employee’s spouse or dependents payments are not excludable from income – effective 8/14/06 (delayed until 2009 for HRA provisions created before 8/14/06)
HRA
HRAs and Cafeteria Plans Employer contributions to an HRA may not be attributable
to salary reductions or provided under a section 125 cafeteria plan to be excluded from taxable income Look at all circumstances in determination
If salary reduction election for coverage period exceeds the actual cost of the accident or health plan coverage for that period, salary reduction is attributable to HRA – Look to COBRA rates for this.
If correlation between maximum reimbursement amount available and amount of salary reduction election for accident and health plan then reduction is attributable to HRA
HRA
HRAs and Flexible Spending Accounts (FSAs) Amount credited to HRA must not be directly or
indirectly based on amount forfeited under FSA If medical expenses are reimbursable under HRA
and FSA, HRA must be exhausted before FSA Before FSA plan year begins, the plan document can
specify coverage under HRA is available only after amount under FSA has been exhausted. In no case can HRA and FSA reimburse the same medical care expenses.
HRA
Nondiscrimination rules applicable to HRAs Section 105(h) same as for self-insured medical
reimbursement plans HRA is subject to COBRA
If individual elects COBRA continuation coverage HRA must provide for continuation of maximum reimbursement with increase at same time and same increment as similarly situated non-COBRA beneficiaries
Plan can provide for continued reimbursement regardless of election of continuation coverage (not mandatory)
No Reporting Requirement for HRA.
Health Savings Accounts (HSA) Created by the Medicare Prescription Drug
Improvement and Modernization Act of 2003 Effective for Taxable years beginning after
12/31/03 Tax-exempt trust or custodial account
created exclusively to pay for qualified medical expenses of the account holder (employee) and his or her spouse and dependents.
Subject to rules similar to those for IRAs
HSA
Qualifications for exclusion Individuals must be only in high deductible health plan
(HDHP) Annual deductible for 2009 must be at least $1,150 for
individual coverage and $2,300 for family coverage with out of pocket expense limits no more than $5,800 for individual coverage and $11,600 for family coverage. If family coverage, no amounts are payable from HDHP until
the family has incurred medical expenses in excess of minimum annual deductible.
An HDHP can have a smaller deductible or none at all for preventive care.
HSA
Qualifications for exclusion cont’d The insurance can be a PPO or POS – in which
case the annual out-of-pocket limit is determined by services within the network.
HSA
Contributions Contributions can be made by the employer and
employee – All contributions are aggregated for purposes of maximum contribution limit.
Contributions to Archer MSAs reduce the limit available for HSA for tax exclusion
Any amount over the limit is includable in gross income There is a 6% excise tax for excess individual and
employer contributions in addition to all federal taxes.
HSA
Contributions Maximum annual contribution is the lesser of
100% of annual deductible Maximum deductible permitted same as Archer MSA
For 2009 maximum is $3,000 for an individual and $5,950 for a family
Catch up is allowed for individuals at least 55 years old on the last day of the tax year. For 2009 and beyond $1,000
HSA
Contributions No contributions can be made once the individual
is eligible or Medicare (65 years old). Amounts can be rolled over from an Archer MSA
and IRA, or another HSA Employer contributions must be the same for
everyone with comparable coverage either at the same amount or percent of deductible Comparability is applied separately to part-time
workers (normally less than 39 hours per week).
HSA
HSA and HDHP can be included in a Cafeteria Plan
HSAs are not subject to COBRA continuation coverage
HSA
Distributions Excluded from gross income if for qualified
medical expenses of employee, spouse or dependents. If not used for qualified medical expenses then it is
included in gross income and subject to additional 10% tax unless after death, disability, or the employee reaches 65 years old.
HSA
Distributions Qualified medical expenses
Generally health insurance premiums are not qualified except: Qualified long term care insurance COBRA health care continuation coverage Health insurance premiums while the individual is receiving
unemployment compensation benefits Individual over 65 for Medicare premiums and employer
share of premium for employer provided health insurance Cannot use HSA funds to pay premiums for Medigap
policies.
HSA
Distributions Employers are not required to determine whether
HSA distributions are used for qualified medical expenses. Employee makes determinations and must maintain records to substantiate.
Employers can provide eligible individuals with debit, credit or stored-value cards – same guidance as under HRAs
HSA – Reporting Requirements Employer contributions and salary reductions
contributions (pre-tax deductions) 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 reduction Box 1, 3, and 5 on W-2 Employee can deduct up to the annual limit on personal tax
return
Sick Pay
Paid by employer from regular payroll account Taxable as regular income
Separate plan (STD, LTD) Premiums paid by employee on after tax basis – benefits
are not taxable Premiums paid by employer or on pre-tax basis – benefits
are fully taxable. Premiums paid by employer and employee (after-tax) –
portion of benefits attributable to employer-funded portion is taxable.
Sick Pay
Responsibility for income withholding and employment taxes Employer pays and is self-insured
Employer withholds taxes based on employee’s most recent W-4
Employer withholds and pays employer share of Social Security, Medicare, and FUTA taxes for all payments made within 6 calendar months after the end of the last month during which the employee worked. If employee returns to work, new six-month period begins if
employee is later on disability
Sick Pay
Responsibility for income withholding and employment taxes Payments made by employer’s agent – employer
is self insured. Agent may withhold FIT at 25% in 2009 Employer retains responsibility for Social Security,
Medicare, and FUTA unless agreement with agent to take on this responsibility.
Sick Pay
Responsibility for income withholding and employment taxes Payments are made by an insurance company
who receives premiums for disability coverage. Third party not required to withhold FIT from payments
unless requested by disabled employee (W-4S) IRS allows for fixed amount or percentage (W-4S has no
provision for percentage) Third party withholds and remits Social Security and
Medicare taxes or advises employer who pays the taxes and includes in 941.
Sick Pay
Permanent Disability benefits Payments subject to income tax to extent
premiums were paid by employer or with pre-tax dollars
Payments are not subject to Social Security, Medicare, or FUTA
Workers’ Compensation Insurance Form of insurance employers are required to
buy to insulate them from lawsuits brought by employees who are hurt or become ill while working. Benefit payments – not included in gross income
or subject to any employment taxes Premium payments – paid by employer based on
specific earnings and classifications.
Retirement and Deferred Compensation Plans Qualified Pension and Profit Sharing Plans
IRC 401(a) Cash or Deferred Arrangements IRC 401(k) Tax-Sheltered Annuities IRC 403(b) Deferred Compensation Plans for Public
Sector and Tax-Exempt Groups IRC 457 Employee-Funded Plans IRC 501(c)(18)(D) Individual Retirement Accounts (IRA)
Retirement and Deferred Compensation Plans Simplified Employee Pensions IRC 408(k) Savings Incentive Match Plans for
Employees of Small Employers (SIMPLE Plans)
Employee Stock Ownership Plans Nonqualified Deferred Compensation Plans
Qualified Pension and Profit Sharing Plans 401 (a) Defined Benefit Plans
Benefit to employee based on age, compensation level and length of service
Defined Contribution Plans Account for each employee, with set amount
being contributed. Employee’s retirement benefit depends on the amount of money in the account at retirement.
Qualified Pension and Profit Sharing Plans 401 (a) Defined Contribution Plans
Money Purchase Pension Plan - Employer makes contributions each year based on employee’s compensation.
Profit Sharing Plan – Employer contributions are substantial and recurring, although they may be discretionary to some degree
Qualified Pension and Profit Sharing Plans 401 (a) Annual Compensation and Contribution Limits
Set by Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)
For 2009 annual compensation limit is $245,000 (indexed annually to the next lowest multiple of $5,000).
Annual contributions and other “additions” to defined contribution plans is limited under IRC 415 to the lesser of $49,000 in 2009 (indexed annually) or 100% of employee’s annual compensation.
Pre-tax elective deferrals to 401(k), 403(b), 457, 125, 132(f)(4) are included in employee’s contribution to determine the limit.
Qualified Pension and Profit Sharing Plans 401 (a) Tax Treatment of Pension and Profit Sharing
Plans Qualified Plan – meets certain requirements under
IRC 401(a) regarding participation, vesting, contribution limits, benefit limits, and nondiscrimination in favor of highly compensated employees. Employer contributions are excluded from wages and
are not subject to federal income tax withholding, or Employment taxes.
Employee after-tax contributions are included in income and taxable whether voluntary or required.
Qualified Pension and Profit Sharing Plans 401 (a) State Tax Treatment of Pension Payments
1996 Law (HR394) prohibits states from imposing income tax on the “retirement income” of non-residents.
Cash or Deferred Arrangements (CODA) Voluntary Salary Reduction Plan – 401(k)
Pension Protection Act of 2006 put ability to automatically enroll employees in 401(k) plan into the law for plan years starting after 12/31/07 Must provide specific schedule of automatic contribution. It must be
at least 3% at hire and may stay at that level until the beginning of the second year after hire.
Increases must be at least 1% each year up to 6% for fourth. The arrangement can specify larger percents up to 10% of compensation.
If employer matches contributions, the plan must provide 100% match for first 1%; plus 50% for contributions between 2% and 6% or non-elective contribution of at least 3% of compensation – cannot contribute at high percent for highly compensated employees and cannot match contributions over 6%.
When hired employees must have 90 days to withdraw from automatic elections and recover contributions from the plan. Employees can change or stop future contributions at any time.
CODA
Contribution Limits for 401(k) 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 states) Taxable for Employment Taxes
Reporting for 401(k) contributions on W-2 Not in box 1, but in boxes 3 & 5 In box 12 with a “D” Retirement box is checked in there were any deductions
in the tax year.
CODA
“Catch-up” contribution began in 2002 Under EGTRRA – Applies to plans 401(k), 403(b),
SEP, Simple, and 457 plans Employee must be at least 50 years old in the current
year Limits of “catch-up” for all but SIMPLE
2009 catch-up limit is $5,500 Limit will be adjusted for inflation in $500 increments for
future years SIMPLE “catch-up” limit is $2,500 in 2009. Limit will be
adjusted for inflation in $500 increments for future years.
CODA
Non Discrimination Testing Must not discriminate in favor of highly compensated
employees 5% owner of stock or capital Annual compensation over $110,000 (2009) or top paid 20%
of employees Other Contributions can be included “Catch-up” Contributions are not counted.
At least 70% of non-highly compensated employees must be eligible or the % of non-highly compensated eligible employees is at least 70% of the percentage of eligible highly compensated employees.
CODA
Non Discrimination Testing Other ways to meet non-discrimination testing
Employer matches 100% of elective deferrals for not highly compensative employees up to 3% and 50% up to 5%
Employer is required to contribute at least 3% of salary for non highly compensated employees regardless of the employee’s participation in 401(k)
CODA
Failure of ADP (Actual Deferral Percentage) Test Must distribute some elective deferrals and
earnings to highly compensated employees within certain period and report on 1099-R
CODA
Holding period for 401k contributions In 1996 the Labor Dept. shortened the maximum
holding period for 401(k) contributions from 90 days to the 15th business day of the month following the month during which the amount would have been paid to the employee.
Employers who cannot meet the deadline can have an extra 10 business days, but must provide reasons for the delay.
CODA
Early Distribution Penalty If employee receives a distribution before retirement (with
exceptions) there is a 10% excise tax on the taxable portion of the distribution.
Veterans can make deferrals for years spent in military service Extra deferrals can be made for up to three times the
period of military service (not to exceed 5 years) Separate reporting requirements Not included in non-discrimination tests.
Roth 401(k)
Starting in 2006 employers may permit employees to designate some or all of the contributions as Roth 401(k) The contributions are made with after-tax dollars. The earnings from the eventual distribution will be
tax exempt. All 401(k) contributions (both pre-tax and Roth)
are taken into account for limits and 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.
403(b)
Requirements Annuity contract may not be purchased through a qualified
annuity plan under Section 403(a) Employee’s rights must be non-forfeitable unless employee
fails to pay premiums Plan (other than church plan) must meet non-discrimination
requirements. Plan must offer all employees the chance to defer at least
$200 annually if one employee is given the opportunity. The elective deferral limits must be met if plan provides for
salary reduction agreement.
403(b)
Requirements and Taxability Has many of the same requirements as 401(k) Employer contributions (e.g. match) are not
included in wages or subject to withholding Employee contributions are not Taxable for
Federal Income Tax and most state income taxes. Employee contributions are Taxable for
employment taxes
403(b)
Reporting on W-2 Contributions not in box 1 but in boxes 3 & 5.
Contributions also show in box 12 with an “E” Box 13 Retirement plan is checked if there are
any contributions for the tax year Catch-up special rule
For employees with as least 15 years of service with employer.
403(b)
Catch-up special rule Amount of catch-up limited to the lesser of
$3,000 additional contribution in any year (same as catch-up for those at least 50 years old)
$15,000 reduced by any amounts contributed under this special provision in previous years.
$5,000 x years of service less total elective deferrals from previous years.
If eligible for both special and over 50 catch-up cannot go over $5,500 – first dollars considered under special rule.
Deferred Compensation Plans for Public Sector and Tax-Exempt Groups (IRC 457) Who can Offer
State and local government employers and tax-exempt organizations (other than churches)
Eligibility Only individuals performing services for the employer are
eligible (including independent contractors) Nondiscrimination Testing
457 plans can be discriminatory. Deferral Limits
Same as 401(k)
IRC 457
Catch-up Contributions – new in 2002 Same as 401(k)
Special rule near retirement For last 3 years before normal retirement,
maximum deferral is lesser of twice the normal deferral or the current year limit plus the limits from previous years, reduced by participant’s deferrals for those years.
Cannot use both Catch-up and Special Rule
IRC 457
Rules Funds and earnings in tax-exempt trust for
exclusive benefit of employees and beneficiaries Funds must be transferred within 15 business days after
the month when would have been paid to employees. Deferrals and earnings remain assets of the
employer subject to employer’s general creditors
IRC 457
Tax Treatment Not subject to federal income tax withholding Are subject to Social Security, Medicare, and FUTA as
soon as there is no substantial risk of forfeiture of right to the benefit
Reporting Not in Box 1 of W-2, but in Box 3 and 5 with Social Security
and Medicare taxes in Boxes 4 and 6 respectively and in Box 12 preceded by Code “G.”
Employer should not mark check box in Box 13 “Retirement plan” based on 457 deferrals
IRC 457
Distributions – Changes made by Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001 No distributions before employee reaches age 70-1/2,
separation from employment (retirement) or the employee faces an unforeseeable emergency.
Plan may allow early distribution if total amount payable is no more than $5,000 and no amount has been deferred within 2 years of the distribution.
Distributions are considered pension Entity distributing has responsibility for withholding and
remitting income taxes
Individual Retirement Accounts (IRAs) Employer sponsored IRA must be in writing
and created for exclusive benefit of employees and beneficiaries.
Contribution Limits 2009 $5,000 After 2009 adjusted for inflation to next multiple of
$500
IRA
Catch-up Provision Participant must be at least 50 by the end of the
year. Can deduct an additional $1,000 in years 2009 and
beyond.
IRA
Tax Treatment Contributions are deductible
Reduced if employee or spouse is an active participant in a qualified retirement plan
Amount of reduction is based on adjusted gross income. For 2009 the reduction begins for married employees filing
a joint return at $89,000; single $55,000; married filing separately $00.
Employee not active participant (but spouse is) reduction starts at $166,000 for 2009 (married filing joint return)
Taxability for deduction totally eliminated at $10,000 over the above limits ($20,000 for joint filers beginning in 2007).
Roth IRA
Contributions Established by Taxpayer Relief Act of 1997 Contributions are Taxable –There are no phase-outs
because of active plan participant status, but the amount allowed is reduced by an contributions by the individual to other IRAs for that year
For 2009 the amount that can be contributed is phased out once individual’s adjusted gross income exceed $166,000 for joint filers or $105,000 for single filers in 2008 (adjusted annually for inflation). Contributions are completely phased out at $176,000 for joint filers and $120,000 for single filers.
Roth IRA
Employers can allow direct deposit of contributions No contribution allowed by employer Participation Voluntary No endorsement by employer allowed IRA sponsors publicize direct to employees Contributions are remitted to IRA sponsor Employer does not receive any kind or
consideration.
Roth IRA
Distributions Distributions are not included in gross income
If made no sooner than 5 years after first contribution and
Made on or after age 59-1/2, death, disability, or used for a first time home purchase.
Employee Stock Ownership (ESOP) Defined Contribution Plan Stock bonus plan or combined stock bonus
and money plan designed to invest primarily in the employer’s stock.
Same general requirements as IRC 401(a)
ESOP
Tax Treatment Employer contributions are not wages and not
subject to federal income tax withholding, Social Security, Medicare, or FUTA.
Limit 200p – lesser of $49,000 or 100% of compensation.
Nonqualified Deferred Compensation Plans Employer plan to defer compensation to a
later date, which may or may not coincide with retirement.
Plan does not meet requirements of 401(a) No limits Can be discriminatory
Nonqualified Deferred Compensation Plans Tax Treatment
The majority of these plans are unfunded – employee has only employer’s promise; the funds are not protected from the employer’s creditors or successors.
When unfunded, the amounts are not subject to federal income tax, but are subject to Social Security, Medicare, and FUTA.
When distributions are made later, the deferrals and the subsequent interest are subject to federal income tax, but not Social Security, Medicare, or FUTA
Nonqualified Deferred Compensation Plans Requirements
Written plan Employee has a legally binding right to
compensation that has not been actually or constructively received and that is payable in a later year.
Nonqualified Deferred Compensation Plans Reporting Requirements
Amounts deferred into unfunded plan are reported in Box 3 and 5
Such deferrals are reported in Box 11, but only if they are for prior year services.
Amounts distributed are reported in Box 1 only The amounts should be reported in Box 11, if there were
no deferrals in the year of distribution.
Family and Medical Leave Act (FMLA) Guarantees employees (in workplaces with
50 or more employees) unpaid leave in a 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
parent. To care for themselves if they are seriously ill. Any qualifying exigency (i.e. need) arising out of
the fact that the employee’s spouse, son, daughter, or parent is a covered military member on active duty or has been notified of an impending call to active duty in support of a contingency operations.
FMLA – Reasons for FMLA
26 weeks in a “single12 month period” To care for military service member with serious injury or
illness suffered in the line of duty if the employee is the employee is spouse, son, daughter, parent, or next of kin of covered service member.
If employee does not take full 26 weeks remainder is forfeited.
No more than 26 weeks can be taken even if there is another reason during the 12 month period beginning on the first day the employee takes leave.
FMLA - Eligibility
Has been employed by employer for at least 12 months (not necessarily consecutively)
And has worked at least 1,250 hours within the previous 12-month period. Exempt employees who have been employed one
year are deemed to meet the hours worked requirement unless employer can prove otherwise (A part time exempt employee scheduled to work less than 24 hours per week).
FMLA – Paid vs. Unpaid Leave Employers can require eligible employees to
use any paid leave as part of guaranteed leave. Employer must designate time off as paid or
unpaid FMLA within 2 business days of receiving notice.
FMLA – Notice Requirement
Employee must give employer 30 days notice If not foreseeable – whatever notice is possible
under the circumstances. If foreseeable and not notified, employer can deny
leave request for up to 30 days after notice is provided.
FMLA – Notice Requirement
Employer must advise eligibility within 5 days of notice or when employer becomes aware that employee may qualify for FMLA If employee is not eligible the employer must give at least one
reason for the denial Employer must provide separate notice as the same time of
FMLA rights including How 12 month period was determined Certification Requirements Requirement to take paid leave Premium payment requirements for health benefits Job Restoration rights including effect of “key employee” designation Potential liability for health insurance premiums if employee does not
return to work
FMLA – Job Guarantee
Upon return employee is entitled to previous job or “equivalent” with no loss of pay or benefits. Employee is not entitled to accrue any benefits or
seniority during an unpaid FMLA leave Any benefit increases or improvements not
dependent on seniority must be made effective upon return
FMLA time must be treated as continuous service under pension and retirement plans for vesting and qualification purposes.
Intermittent FMLA
Several Days Working reduced hours
If reduced hours, employer can deduct from exempt employee’s salary without converting employee to non-exempt under FLSA
FMLA – Loophole and Recordkeeping Coverage Loophole
The law requires employers to allow leave if there are 50 employees employed by the employer within 75 miles of the employee’s worksite when leave is requested.
Recordkeeping requirements Basic payroll records regarding hours worked,
rate of pay, deductions, details of dates and amounts of FMLA leave taken; copies of notices and documents related to FMLA leave.
FMLA/Health Insurance
FMLA guarantees continuation of employee’s health benefits while on leave. Employer can require employee’s premiums
Can be paid before, during or upon return Pre-paid cannot be only option Catch-up can be sole option only if it is the only option
offered to employees on unpaid non-FMLA leave. If during leave, payments are missed, the employee can
be dropped after 30 days. Notice must be provided to employee and 15 days
allowed before coverage is dropped.
FMLA/Medical Flexible Spending Offered under Cafeteria Plan Employees must be allowed to:
Continue coverage including health FSA while on FMLA leave
Revoke coverage or to continue coverage but discontinue paying premiums during the leave.
Reinstate health FSA coverage upon returning to work from unpaid FMLA leave Employer can require reinstatement if required of
employees on unpaid non-FMLA leave.
FMLA/COBRA
Qualifying event is deemed to occur on the last day of FMLA leave if employee terminates employment at the end of FMLA leave. Maximum continuation coverage period is
measured from that date or the date coverage is lost whichever is later.
FMLA – Key Employees
Employer may deny reinstatement to “key employees” if necessary to prevent “substantial and grievous” economic injury to the employer’s operations.
Key Employee Salaried person among the highest 10% of all employees
within 75 miles of the employee’s worksite. Employee must be informed of possibility upon request and
must be notified in writing (in person or certified mail) as soon as the determination is made within 5 days of request for leave.
Cafeteria Plans
Specific type of flexible benefit plan authorized by Section 125 of the Internal Revenue Code Must contain at least one Taxable (cash) and one
Non-Taxable (qualified) benefit. Participation must be restricted to employees and
must be maintained for their benefit.
Cafeteria Plans
Examples of Qualified Benefits Accident and health insurance plans Dependent care assistance Group-term life insurance Qualified adoption assistance
Cafeteria Plans
Funding Flex Dollars or Flex Credits Salary Reduction
Prohibition – Deferred Compensation Carry over unused contributions or benefits from
one plan year to another. Use contributions from one plan year to purchase
benefits employer will provide in later plan year.
Cafeteria Plan Requirements
Written Permanent Plan Description of benefits and period of coverage Plan’s rules for eligibility Procedures for elections Manner in which contributions are made Maximum amount of employer contributions
available to any participant Definition of plan year
Cafeteria Plans – Qualifying Event Change in status that allows employee to
revoke or change an election during plan year Marital status Change in number of dependents Employment status change – employee or spouse Change in dependent status Residence change – employee, spouse or
dependent Adoption
Cafeteria Plans – Qualifying Event Cost-driven change that allows change in
election during plan year Cost of qualified benefits increases or decreases New benefit option Dependent Care - cost change imposed by 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 employee’s income.
Cash – if employee chooses cash, it is fully taxable.
Tax Treatment of Cafeteria Plans Discriminatory plans
No negative tax consequences to non-key employees
Key employees have taxable income equal to the highest amount of taxable benefits they could have selected.
Flexible Spending Arrangements (FSAs) Can be offered as part of a cafeteria plan Coverage requirements
Specified expenses incurred by employees subject to maximums and other reasonable conditions.
Maximum reimbursement amounts cannot be more than five times the total premium for employee’s coverage (life, health, dental, vision).
Health Care FSA
Elections must be made before year begins Cannot allow compensation to be deferred beyond
the plan year or used for another benefit. Excess premiums in health FSA that exceed all
reimbursements of claims and administrative costs can be used to reduce employees’ required premiums as a dividend or premium refund. Must be allocated on uniform basis.
Starting in 2006 employers can allow a 2-1/2 month grace period for employees to spend money in their FSA – this will affect employees ability to elect HSA
Health Care FSA
Maximum amount of reimbursement selected by participant must be available at all times during the plan year. Amount available is reduced by reimbursement
claims The premium payment schedule cannot be
accelerated because of claims or employee separation from employment.
Health Care FSA
Reimbursements Medical FSAs can only reimburse medical
expenses incurred during coverage period – cannot reimburse premiums
Medical expenses must be substantiated by third party and a statement from employee that the expense is not reimbursable under any other coverage is required.
Reimbursements can only be made for expenses actually incurred during period of coverage – when medical care if provided.
Dependent Care FSA
Not subject to uniform coverage rule – reimbursements are only made up to the amount already deducted.
Employees can be reimbursed up to $5,000 of dependent care expenses.
Employees must reduce any dependent care tax credit they receive dollar for dollar by any amounts contributed to Dependent FSA Amount deducted for Dependent FSA goes in Box
10 on the W-2
State Taxation
Starting on page 4-126 – table of State Taxability
Illinois Deferrals under Section 125 or 401 are not
taxable for state income tax, though they are taxable for SUI
Deductions used to purchase medical or life insurance are not taxable for state income tax or SUI.
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