health, accident & retirement

Health, Accident & Retirement

Nancy E. Parkinson, CPP

Content coverage:• Health Insurance

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

• Sick Pay STD LTD 3rd Party Sick Pay

• Worker’s Compensation Insurance• FMLA• Retirement and Deferred Compensation Plans

Health & Accident Insurance Contribution- Tax Treatment

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 status will continue to apply to a person who is receiving more than ½ his/her support from the taxpayer even if their earnings more than the annual exemption.

Taxes ExcludedFederal Income Tax

Employment TaxesSocial SecurityMedicare FUTA

Based on one of the followingPlan is writtenReferred to in employment contractEmployees contribute to the planEmployer contributions are made to a

separate fundEmployer is required to contribute

Health & Accident Insurance Contribution- Tax Treatment Cont.

Exclusion from Social Security , Medicare & FUTA must:

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.


Effective March 30, 2010.

Extends dependent (child) age limit to 27.

For children under age 26, the plan cannot define “dependent” for purposes of eligibility other than in terms of relationship between child and participant (employee)

Plan cannot limit coverage based on marital status of child (but it doesn’t have to cover a spouse of a child or a child of a child)

Health Care Reform Act

Benefits received directly or indirectly reimbursing the employee for medical expenses incurred are not included in employee’s income

Any reimbursements in excess of actual expenses are taxable income to the employee

Payments for loss of limb or disfigurement as part of AD&D are not included in income (payments must not be related to time lost from work).

Health Care Reform Act changed definition of “medical expense” re: medicines.


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)

Health Insurance – Nondiscrimination Requirements

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

Amounts paid to highly compensated employees must be included in taxable income

Highly Compensated employees:5 highest-paid officersOwner of more than 10% of employer’s

stockTop-paid 25% of employees

Discriminatory Plan

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 2011 annual deductible

$2,050 – $3,050 for individual $4,100 - $6,150 for family.

Maximum out-of-pocket expenses can be no more than $4,100 for individual coverage $7,500 for family coverage.

Cannot be part of Cafeteria Plan

Contributions can be made by employer or employee (not both)

Employee contributions are deductible from income on personal tax return.

Subject to federal income tax withholding and employment taxes.

Employer contributions are excludable from income.

Medical Savings Accounts (Archer MSA) Cont.

Employee deduction cannot exceed employee’s compensationDeduction or Contribution is limited to:65% of the plan deductible for individual coverage 75% of the plan deductible for family coverage.Employer contributions must be the same amount for each

employee either dollar amount or percentage of applicable deductible.Employer contributions in excess are included in

income.

MSA Contribution Limitations

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 of earnings 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.


Employer ContributionsBox 12 R on W-2Plan trustees report on 5498-MSAReported on employee’s personal tax return

Employee DeductionsBox 1, 3 and 5 on W-2Employee takes deduction on personal income tax

return for amount contributedPlan trustees report on 5498-MSA

DistributionsPlan trustees report on 1099-MSA


• 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 $300/day in 2011 (indexed for inflation)

• Excess will be excluded to the extent of actual cost of care

Long Term Care Insurance

RestrictionsNot subject to COBRACannot be part of Cafeteria PlanIf part of flexible spending arrangement it is

included in employee’s taxable income

Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)

Requires health plan sponsors to provide employees and their beneficiaries with the opportunity to elect continued group health coverage for a given period should their coverage be lost due to “qualifying event”

Applies to employers with 20 or more employees (FTEs) on typical business day.

Coverage period generally is 18 to 36 months

Coverage same as provided to similarly situated beneficiaries who have not suffered the qualifying event.

Employees who purchased health care coverage under a cafeteria plan (including flexible spending) are eligible for COBRA continuation at level of coverage before event.

Long Term Care Insurance is not included in COBRA

Qualifying Events

Death of covered employee – 36 monthsCovered employee’s termination of employment or reduction

in work hours (other than gross misconduct) – 18 monthsIf the reason for absence is employee’s military service –

24 monthsIf another qualifying event occurs (other than employer’s

bankruptcy) period extends to 36 months.Qualified beneficiary (employee or dependent) is disabled

under Social Security Act during the first 60 days of continued coverage - 29 months

If another qualifying event during 29 months (other than employer bankruptcy) coverage extends to 36 months

Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) Cont.

Employer’s bankruptcyCoverage is life of retiree or retiree’s spouse.Once retiree dies – 36 months for retiree’s spouse

and children from date of retiree’s deathDivorce or separation of covered employee

(date of divorce is the qualifying event) – 36 months Dependent child losing that status – 36 months

Premium RequirementsCan 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 provisionsElection period must last at least 60 days from the date

when coverage was terminated or the qualified beneficiary receives notice – which ever is later.

Plan must provide written notice of COBRA continuation coverage within 90 days of when coverage begins

Employee or Employer must notify plan administrator of qualifying event, responsibility and timing depends on the event

Once aware of the qualifying event, plan administrator has 14 days to notify qualified beneficiaries of their rights.


Penalties for NoncomplianceEmployers 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



FMLA/COBRA Interaction

Date employee is to return to work at end of FMLA Leave (or date employee notifies employer he/she is not returning if before end of FMLA Leave) is qualifying date.

Unpaid required premium while on FMLA Leave does not eliminate the employees right to COBRA continuation coverage

American Recovery and Reinvestment Act of 2009 (AARA)

Discounted COBRA Premiums & SubsidiesAmerican Recovery and Reinvestment Act of 2009 (AARA)

– provides employees who have involuntarily lost their job chance to pay for continued health insurance at a deep discount. “Assistance eligible individuals” pay 35% of COBRA continuation coverage premium.

Assistance Eligible Individual defined as an employee who has involuntarily lost his/her job

The qualifying event must have occurred between Sept 1, 2008 and May 31, 2010.

Termination has to be involuntary and no caused by employee’s gross misconduct.

Individual can be “assistance eligible” more than once!

Discounted premium is calculated on the amount employee would normally be required to pay for COBRA coverage.

American Recovery and Reinvestment Act of 2009 (AARA) Cont.

Assistance for the subsidy ends with first month beginning on or after the earlier of:

15 months after 1st day of 1st month of eligibilityEnd of maximum required period of COBRA

continuation coverageDate the individual becomes eligible for Medicare

benefits or health coverage under another group health plan (after end of any applicable waiting period)

Employee must notify plan upon eligibility for other coverage


Regular COBRA continuation notice must now also include:

Description of beneficiary’s right to premium reductionForms necessary to establish eligibility & apply for

premium reductionContact information for group health plan

administratorDescription of extended election period for individuals

who had COBRA continuation coverage in effect on Feb 17, 2009

If available, option to enroll in different coverage than what beneficiary was covered by (prior to the qualifying event)

Beneficiary’s obligation to notify plan of eligibility under another group health plan or Medicare and subsequent penalties for not providing such information

Employer can face penalties for not providing notices to eligible individuals


Employer can allow an assistance eligible individual to change coverage options. If allowed:

Premium must be no more than than premium paid by individual for coverage prior to termination of employment

Different coverage must also be offered to employers’ active employees

Coverage requirements:Must include health care coverageCannot be a flexible spending arrangementCannot be for treatment at an on-site medical

facility maintained by employer that consists primarily of first-aid services, prevention & wellness care, or similar care


High earners may have to pay back subsidy as tax payment (if modified AGI exceeds $145,000 ($290,000 for joint filers) – employer does not make this determination but is made when filing Form 1040

High earners can “opt out” of the COBRA subsidy

Employer is usually responsible for subsidizing COBRA discount and claiming reimbursement of that amount against its payroll taxes on Form 941

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

(unused portion carried forward to subsequent coverage periods).

Unused portion cannot be paid to employee at end of year (or at termination)

Health Reimbursement Arrangements (HRA)

Health Reimbursement Arrangements (HRA) Contd

Benefits under HRA:

Generally excluded from employee’s gross incomeQualifications for exclusion:

May only reimburse expenses for medical care as defined in IRC section 213(d)

Expenses must be substantiatedExpenses may not be for prior taxable year, incurred

before date the HRA began, or before employee enrolled in HRA

Qualifications for exclusionNo right to receive cash or any benefit (other than

reimbursement of medical care expenses).If any person has such a right currently or in an future year, all distributions to all persons under HRA in current year are included in gross income (even amounts paid to reimburse medical care expenses).

Arrangements outside HRA that provide for adjustment of employee’s compensation will be considered in determining eligibility for exclusion.If bonus at retirement is related to HRA balance or severance is paid only to employees who have HRA balance, then all reimbursements for all participants are disqualified.


Qualifications for exclusion (Cont)Reimbursements can be to former employees and retirees

up to the unused balance.Employer may reduce maximum balance after retirement

or termination for any administrative costs of continuing coverage.

Employer may or may not provide an increase in amount available after an employee retires or terminates employment.

If HRA allows payment of medical benefits to designated beneficiary other than the employee’s spouse or dependents payments are not excludable from income

– effective 8/14/06 (delayed until 2009 for HRA provisions created before 8/14/06)


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 determinationIf salary reduction election for coverage period exceeds

the actual cost of the accident or health plan coverage for that period, salary reduction is attributable to HRA – Look to COBRA rates for this.

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

Health Reimbursement Arrangements (HRA) Cont

HRAs and Flexible Spending Accounts (FSAs)

Amount credited to HRA must not be directly or indirectly based on amount forfeited under FSA

If medical expenses are reimbursable under HRA and FSA, HRA must be exhausted before FSA

Before FSA plan year begins, the plan document can specify coverage

In no case can HRA and FSA reimburse the same medical care expenses.

Reimbursements can be paid with debit/credit cards Change in “medical expense” definition – effective January

1, 2011. Only reimbursable if such medicine or drug is a prescribed drug or is insulin.



Nondiscrimination rules applicable to HRAs

Section 105(h) same as for self-insured medical reimbursement plansHRA is subject to COBRA

HRA must provide for continuation of maximum reimbursement with increase(s) at same time and same increment as similarly situated non-COBRA beneficiaries

Plan can provide for continued reimbursement regardless of election of continuation coverage (not mandatory)

No Reporting Requirement for HRA.

Medicare Prescription Drug Improvement and Modernization Act of 2003

Effective for Taxable years beginning after 12/31/03

Tax-exempt trust or custodial account created exclusively to pay for qualified medical expenses of the account holder (employee) and his or her spouse and dependents.

Subject to rules similar to those for IRAs

Health Savings Accounts (HSA

Health Savings Accounts (HSA ) Cont

Qualifications for exclusion

Individuals must be only in high deductible health plan (HDHP)

Annual deductible for 2011at least $1,200 for individual coverage

out of pocket expense limits no more than $5,950 $2,400 for family coverage

out of pocket no more than $11,900 for family coverage.

no amounts payable for medical expenses until family has incurred annual covered medical expenses in excess of minimum annual deductible

An HDHP can have a smaller deductible or none at all for preventive care.

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 networkContributions

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 incomeThere is a 6% excise tax for excess individual and

employer contributions in addition to all federal taxes


Contributions (cont’d)Maximum annual contribution is the lesser of

100% of annual deductible or Maximum deductible permitted same as Archer

MSA

For 2011 maximum is $3,050 for an individual $6,150 for a family

Catch up is allowed for individuals at least 55 years old on the last day of the tax year.

For 2009 and beyond $1,000


Health Savings Accounts (HSA ) ContContributions (cont’d)No contributions can be made once the individual is

eligible for Medicare (65 years old).

Amounts can be rolled over from an Archer MSA and IRA, or

another HAS

Employer contributions must be the same for everyone with comparable coverage either at the same amount or percent of deductible

Comparability is applied separately to part-time workers (normally less than 39 hours per week).

Employers can make a one-time transfer of balance in employee’s HRA or FSA to an HSA. Maximum amount is lesser of HSA or FSA balance on date of transfer OR September 21, 2006. Must be completed by January 1, 2012.


Contributions (cont’d)Transfer from an IRA is permitted as a one-time

contribution to an HSA – up to maximum deductible contribution limit at the time of the contribution

Transfers from an an HRA, FSA, or IRA are treated as rollover contributions and are non taxable

EXCEPTION: unless employee is not an eligible individual with coverage under an HDHP at any time during the 12 months beginning with the month of the HSA distribution)

HSA and HDHP can be included in a Cafeteria Plan

HSAs are not subject to COBRA continuation coverage

Calculating Comparable ContributionsSect 4980G mandates use of calendar year for

comparability testing purposes

Several ways to comply with testing requirements:Pay-as-you-go basisLook-back basisPre-funded basis

Impermissible Contribution Methods do exist!


Health Savings Accounts (HSA ) ContDistributions

Excluded from gross income if qualified medical expenses of employee, spouse or

dependents.

If not used for qualified medical expenses included in gross income

subject to additional 10% tax unless after death, disability, or the employee reaches 65 years old.

DistributionsQualified 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.



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


In 2004, IRS issued guidance clarifying how FSAs and HRAs interact with HSAs

Employee covered under DHDP and a health FSA or HRA that pays or reimburses medical expenses, not eligible to make contributions to an HSA

CAN make contributions to an HSA for period of time employee is covered under certain specified types of employer-provided plans that reimburse employee medical expenses

Limited purpose health FSA or HRASuspended HRAPost-deductible health FSA or HRARetirement HRA


Effect of FSA grace period on HAS eligibilityIn 2005, IRS issued guidelines clarifying an employee participating in an FSA and covered by a grace period (for incurring medical expenses after the end of the plan year) is not eligible to contribute to an HSA until after the FIRST DAY of the FIRST MONTH following the end of the grace period.

Employer could adopt one of two options which will affect employees’ HSA eligibility during the cafeteria plan period

General purpose health FSA during grace periodMandatory conversion from health FSA to HSA

compatible health FSA for all participants

W2 Reporting Requirements

Employer contributions and salary reductions contributions (pre-tax deductions)

Box 12W on W-2

Employer contributions over limitsBox 1,3, and 5 on W-2 with taxes in boxes 2, 4, and 6

Employee contributions not made by salary reductionBox 1, 3, and 5 on W-2

Employee can deduct up to the annual limit on personal tax return


Family Medical Leave Act (FMLA) Allows employees to take up to 12 weeks of unpaid leave in

any 12 month period Newborn or newly adopted child

Take care of seriously ill child, spouse, or parent

Care for themselves if they are seriously ill

Employee’s spouse, child or parent is a covered military member on active duty, OR has been notified of an impending call to active duty in support of a contingency operation (can take up to 26 wks in a 12 month period to care for covered military service member with a serious injury or illness)

Guarantees continuation of employees’ health benefits while on leave

Family Medical Leave Act (FMLA) Cont Applies to private sector employers with 50 or more

employees (including part-time and employees on leave or suspension, but not laid-off employees)

For public sector employees, FMLA applies if the public agency has 50 employees working within a 75-mile radius of employee’s worksite

Employee must have been employed by employer for at least 12 months and have worked at least 1,250 hours within the previous 12-month period the 12 months of employment need not be consecutiveEmployment prior to a continuous break in service of 7

years or more does not need to be counted, unless:For fulfillment of National Guard or ReservePeriod of approved absence or unpaid leave

Family Medical Leave Act (FMLA) Cont Employer decides what constitutes a 12-month period. If

employer fails to make decision clear, the 12-month period is the one most favorable to the employee

Employer can require employee to take leave

“Serious Health Condition” defined in FMLA regulations

Intermittent leaveCan be several days or weeks at a time or by working

reduced hoursReduced hours can be deducted from an exempt

employee’s salary without jeopardizing exempt statusIf employee would be required to work overtime if not for

FMLA leave, hours employee would have been required to work may be counted against FMLA entitlement

Family Medical Leave Act (FMLA) Cont Designation as paid or unpaid leave

Employer an require employee to use paid leave available to the employee

Employer must designate leave as paid or unpaid FMLA leave within 5 days of receiving notice from employee a leave will be taken.

Notice must be in writing.Must inform employee of number of hours, days, or

weeks that will be counted against the employee’s FMLA leave entitlement

Employer must notify employee of eligibility to take FMLA leave within 5 business days after either employee requests leave or employer learns employee’s leave may be for an FMLA qualifying reason. If employee is not eligible for FMLA, notice must indicate at least one reason why employee is not eligible or has no FMLA leave available.

Family Medical Leave Act (FMLA) Cont Regulations provide for a notice of FMLA rights and

responsibilities of the employer separate from the eligibility notice. Notice must include the following information:FMLA leave designationsHow 12 mo period and “single 12-mo period” are

determinedEmployee certification requirementsSubstitution of paid leave for unpaid leavePremium payment requirements to maintain health

benefitsJob restoration rights, including effect of a “key

employee” designationPotential liability for health insurance premiums if

employee does not return to work

Family Medical Leave Act (FMLA) Cont Consequences exist for employer’s failure to follow FMLA

notice requirements

There is a notice requirement for employeesIf medical treatment is forseeable, a 30 day notice (or as

much as can be given under the circumstances)

Medical or military certification can be required by employer

Health insurance benefits employee enjoyed before the leave must be continued during FMLA leave on the same basisEmployer can require any employee premiumsIf employee fails to pay, employee can lose coverage after

30 days, but coverage must be restored when employee returns to work without employee having to meet any additional qualifications for coverage

Family Medical Leave Act (FMLA) Cont Job guarantee upon return from leave – either previous job

or one that is “equivalent” with no loss of pay or benefitsEmployer may deny reinstatement to “key employees” if

it’s necessary to prevent “substantial and grievous” economic injury to the employer’s operations

Key employee = paid on a salary basis; among the highest paid 10% of all employees within 75 miles of employee’s worksite when FMLA leave was requested

Recordkeeping RequirementsBasic payroll records – hours worked, rate of pay,

deductions from wagesRecords detailing dates and amount of FMLA leave takenCopies of notices and documents related to FMLA leave

Family Medical Leave Act (FMLA) Cont Enforcement administered and enforced by Department of

Labor’s Wage & Hour Division

Retaliation for exercise of FMLA rights is prohibited by law

Employers covered by both FMLA and state law must comply with the law that provides the greatest benefits and protection to the employee requesting leave

Interaction of FMLA and cafeteria plansEmployee is responsible for premiums during leaveCafeteria plan may offer one or more of the following 3

payment optionsPre-PayPay-As-You-GoCatch-up

Sick Leave PayPaid by employer from regular payroll account

Taxable as regular income

Sick Leave Pay under a Separate plan (STD, LTD)

Premiums paid by employee on after tax basis – benefits are not taxable

Premiums paid by employer or on pre-tax basis – benefits are fully taxable

Premiums paid by employer and employee (after-tax) – portion of benefits attributable to employer-funded portion is taxable

Sick Pay

Responsibility for income withholding and employment taxes

Employer pays and is self-insuredEmployer withholds taxes based on employee’s most

recent W-4Employer withholds and pays employer share of Social

Security, Medicare, and FUTA taxes for all payments made within 6 calendar months after the end of the last month during which the employee worked.

If employee returns to work, new six-month period begins if employee is later on disability

Sick Pay Cont

Responsibility for income withholding and employment taxesPayments made by employer’s agent OR employer is self

insured.Agent may withhold FIT at 25% in 2011 (35% if

employee’s YTD Supplemental wages exceed $1 million)

Employer retains responsibility for Social Security, Medicare, and FUTA unless agreement with agent to take on this responsibility.

Payments are made by an insurance company (3rd party) who receives premiums for disability coverage.Third party not required to withhold FIT from payments

unless requested by disabled employee (W-4S)IRS allows for fixed amount or percentage (W-4S has no

provision for percentage)Third party withholds and remits Social Security and

Medicare taxes or advises employer who pays the taxes and includes in 941.

Sick Pay Cont

Sick Pay Cont

Reporting ResponsibilitiesEmployer makes payments

Report taxable amounts on Form 941Report income tax withheld on Form 941Report taxable amounts to employee on Form W-2Report payments on Form 940

Employer’s agent makes paymentsUsually employer retains reporting responsibilities

Third-party insurer makes paymentsBoth the employer and the 3rd party have reporting

responsibilities; if 3rd party does not properly transfer liability to employer, 3rd party is required to report on Form 941, Form W2, and Form 940

Permanent Disability benefits Payments subject to income tax when premiums were

paid by employer or with pre-tax dollars

Payments are not subject to Social Security, Medicare, or

FUTAOn or after employment relationship has terminated

because of death or disability retirementEmployee receiving disability insurance benefits

under the Social Security Act – still subject to FUTA

NOTE: Any payment made to former employee (even if employment relationship would not have been terminated) ARE subject to all taxes (EX: unused vacation, etc)

Sick Pay Cont

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 taxesPremium payments – paid by employer based on

specific earnings and classifications

Each state has its own Workers Compensation Insurance law. There are 4 categories:

National Council States (34 states plus District of Columbia)

Non-National Council States (12 states)Monopolistic States (4 states)Competitive State Funds (14 National Council States)

Workers Compensation Insurance

Workers Compensation Insurance ContEmployers are assigned Classification Codes based on

the type of businessThere are classification code exceptions for

employees who work exclusively in an office, outside salespeople, and drivers & their helpers

Certain types of compensation can be excluded when determining total payroll figure

The “half” portion of overtime premiumReimbursed travel expensesThird-party sick payReimbursed moving expensesTipsPersonal use of company-provided vehicleGroup Term Life Insurance over $50,000.Severance PayEducation Assistance PaymentsEmployer contributions to pension or insurance

plans

Cafeteria PlansCafeteria Plans provide employees a choice from a “menu” of cash compensation and nontaxable benefits authorized by Section 125 of the Internal Revenue Code

A qualified Cafeteria Plan must contain at least one taxable (cash) and one nontaxable (qualified) benefit

Examples of qualified benefits:Coverage under accident & health insurance plansCoverage under dependent care assistance plansGroup Term Life insurance on lives of employeesQualified adoption assistancePremiums for COBRA continuation coverageAccidental death & dismemberment insuranceLong-term and short-term disability coverageA 401(k) planContributions to HSA

Cafeteria Plans ContPremium-only plan – known as POP’s or premium

conversion plans. Used by employers who require their employees to contribute towards benefits (usually health insurance)

Deferred Compensation is prohibited under the rules governing cafeteria plans

EXCEPTIONS401(k)Educational institution contributions for

postretirement group-term life insuranceAmounts remaining in a HSA at end of calendar

yearBenefits under a long-term disability policy

relating to more than one yearMandatory two-year election for vision or dentalUsing salary reduction amounts to pay

premiums for the 1st month of the next plan year

Cafeteria Plans ContCafeteria plans are usually funded by either or both of the following:

“Flex dollars” or “flex credits”Salary reduction – pre-tax contributions by the

employee result in a higher take-home pay for the employee

Automatic deferrals (i.e., “negative elections”) are OK

After-tax employee contributions also are part of a cafeteria plan

A Cafeteria Plan must have a written document laying out the particulars of the plan and it must be intended to be a permanent plan. There are certain items the plan must contain to be considered a Cafeteria Plan according to IRC Section 125.

Cafeteria Plans ContBenefit Elections

Usually irrevocable before the benefit becomes available or the plan year begins. Changes or revocations during the plan year are only allowed under limited circumstances.

IRS Regulations clarify employees’ right to revoke or change an election during a plan year based on a change in status

Marital status changesChanges in the number of dependentsEmployment status changes (applies to employee,

spouse, or dependent)

Change in dependent statusResidence changeAdoptions

An election change can be made only if the status change results in the employee, spouse, or dependent gaining or losing eligibility for coverage under the plan

Cafeteria Plans ContSpecial Exceptions

COBRAMedical Support ordersMedicare or Medicaid eligibilitySpecial enrollment rights under HIPPAElective deferrals under a CODAFMLA leave changes

Election changes may also be made to reflect significant cost or coverage changes for all types of qualified benefits provided under a Cafeteria Plan during the plan year.

Contributions may be made to a HSA through a cafeteria plan, with specific rules surrounding the pre-tax qualification

Option election for new employees – 30 days after hire date to elect coverage

Cafeteria Plans ContParticipation in a Cafeteria Plan must be restricted to employees and the plan must be maintained for their benefit. Benefits for children up to age 27 may require plan

amendments.Nondiscrimination testing

Plan cannot discriminate in terms of eligibility, contributions, or benefits in favor of highly compensated individuals, or participants, or key employees

Three main nondiscrimination testsEligibility testContributions and benefits testConcentration test

Special health benefits test

Separate tests allowed for new employees

Cafeteria Plans Cont

“Simple cafeteria plan” nondiscrimination rules for small employers – effective January 1, 2011

“Eligible Employer – Employed an average of 100 or fewer employees during either of the two preceding years. If employer was not in existence throughout preceding year, use avg number of employees it reasonably expects to employ in the current year.

Must meet eligibility and participation requirements:• Employees worked at least 1,000 hrs in

preceding plan year• Employees must be able to elect any benefit

available under the plan Can exclude employees under specific

requirements Must meet minimum contribution requirements Must perform nondiscrimination testing at year

end

Cafeteria Plans ContFlexible Spending Arrangements (FSA’s)

Employees can elect a pre-tax salary deduction to pay for

certain covered health care, dependent care, and adoption expenses.

There are specific requirements that FSA’s must meetElections cover a full plan yearUnder Health Care Reform Legislation, the

deduction is “capped” at $2,500.00 beginning in 2013

No deferred compensation – “use it or lose it”Plan can allow a “grace period” up to 2 ½ monthsUnused balances can be distributed to reservists –

QRD - “qualified reservist distributions” allowable if employer decides to include it in the cafeteria plan – totally taxable

Uniform coverage throughout coverage period12 month period of coverageReimbursements must be for medical expenses –

health care reform legislation limited what is covered

Cafeteria Plans ContFlexible Spending Arrangements (FSA’s) (cont’d)

Prohibited reimbursements; claim substantiation; claims incurred

Limiting health FSA enrollment to health plan participants

Coordination with HIPAA requirements

FSA benefits followed transferred employees after asset sale

Can be set up to use debit and credit cards for payments and reimbursements with specific requirements (limiting card use to appropriate providers; correction procedures after improper payment made)

Cafeteria Plans ContFlexible Spending Arrangements (FSA’s) (cont’d)

Change in “medical expense” definition means new debit card rules – effective January 1, 2011 under IRC 106(f)

Special dependent care assistance rules Reimbursement up to $5,000. per year Expenses are for nonmedical expenses

Debit card programs can be used to provide benefits under a dependent care program, but expenses may not be reimbursed before they are incurred (when the services are provided)

Cafeteria Plans ContAdoption Assistance FSA’s

Similar rules to dependent care assistance FSA’sCannot reimburse employees for expenses other than

adoption expenses

HSA-Compatible FSA’s Limited-purpose health FSAPost-deductible health FSA

Qualified HSA distributionsSpecific requirements under the lawDoes not alter an employee’s irrevocable benefit

elections or constitute a change in status

FSA experience gains or forfeituresIf not retained by employer or used to defray

administrative expenses, it must be allocated among employees

Cafeteria Plans ContTax Treatment of Cafeteria Plans

Employer Contributions relating to nontaxable benefitsExcluded from employee’s incomeNot subject to federal w/h or employment taxes

Employer Contributions to purchase taxable benefitsMust be included in employee’s incomeFully taxable

Employee Contributions to a qualified pre-tax Cafeteria Plan

Totally non-taxable for the employeeTotally non-taxable for the employer

Group Term Life InsuranceUp to $50,000. non taxableOver $50,000. is taxable to the employee

Cafeteria Plans ContTax Treatment of Cafeteria Plans (cont’d)

After-tax ContributionsAre included in employee’s incomeFully taxableBenefit purchased is NOT included in income

Discriminatory plansAny plan that discriminates in favor of highly

compensated or key employees – not disqualified and do not have negative tax consequences for OTHER participants

Highly compensated or key employees LOSE the tax benefits and are subject to all taxes

Taxation of Qualified HSA distributionFrom the FSA to the HSA is a rollover – not taxableIf participant is not an eligible individual at any time

during testing period – full amount of distribution is taxable

Cafeteria Plans ContReporting Requirements

Not reported on Form 941 or W2Form 940

Included in Part 2, Line 3Entered on Part 2, Line 4 as an exempt paymentBox 4a should be checked

Cash or deferred arrangements (ex: 401(k))Not subject to federal withholdingSubject to Social Security, Medicare, and FUTAReported on W2

Wages - boxes 3 & 5; withholding – boxes 4 & 6Box 12 – elective deferral amount – code “D”

Reported on Form 941Lines 5a and 5c

Cafeteria Plans ContReporting Requirements (cont’d)

Dependent care assistanceForm W2

Box 10Excess over $5,000. reported as well in Boxes 1,

3, & 5

Form 5500 Reporting requirement suspended in 2002

No debit or credit card reporting requiredPayments made to medical service providers

through debit and credit cards are exempt from being reported by the employer on Form 1099-MISC

Retirement and Deferred Compensation Plans

Qualified Pension and Profit Sharing Plans IRC 401(a)Cash or Deferred Arrangements IRC 401(k)Tax-Sheltered Annuities IRC 403(b)Deferred Comp Plans for Public Sector and Tax-Exempt

Groups IRC 457Employee-Funded Plans IRC 501(c)(18)(D)Individual Retirement Accounts (IRA)Simplified Employee Pensions IRC 408(k)Savings Incentive Match Plans for Employees of Small

Employers (SIMPLE Plans)Employee Stock Ownership PlansNonqualified Deferred Compensation Plans

Retirement and Deferred Compensation Plans Cont

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.

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 2011 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 2011 (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) Cont

Qualified Pension and Profit Sharing Plans 401 (a) Cont

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.

Payments from pensions and other retirement plans are taxable when received by the employee/retiree

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%.

Cash or Deferred Arrangements (CODA) ContVoluntary Salary Reduction Plan – 401(k) (cont’d)

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.

Eligible Automatic Contribution Arrangement (EACA)

Pension Protection Act of 2006 – added IRC 414(w) Only employees specified in the plan as being

employees covered under the EACA. Automatic enrollment needn’t apply to all eligible employees – just those covered under the EACA

Election to withdraw contributions must be made within 90 days of the “first elective contribution with respect to the employee under the arrangement”

Default elective contribution must be a uniform percentage of compensation

• Contribution Limits for 401(k) 2011 contribution limit is $16,500

Adjusted for inflation in $500 increments

Tax Treatment of 401(k) contributions Not taxable for Federal Income Tax (and

most states) Taxable for Employment Taxes

Reporting for 401(k) contributions on W-2 Not in box 1, but in boxes 3 & 5 In box 12 with a “D” Retirement box is checked if any

deductions in the tax year.

Cash or Deferred Arrangements (CODA) Cont

Cash or Deferred Arrangements (CODA) ContCatch-up” contribution began in 2002

Under EGTRRA –plans 401(k), 403(b), SEP, Simple, and 457 plans

Employee must be at least 50 years old in the current year

Limits of “catch-up” for all but SIMPLE2011 catch-up limit is $5,500Adjusted for inflation in $500 increments

SIMPLE “catch-up” limit is $2,500 in 2011Adjusted for inflation in $500 increments

“Catch-up” was to sunset in 2010. Pension Protection Act of 2006 repealed the sunset provision.

Non Discrimination Testing

Must not discriminate in favor of highly compensated employees

5% owner of stock or capitalAnnual compensation over $110,000 (2011) If employer wishes, they can limit employees fitting

under annual compensation limit to the top paid 20% of employeesOther 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.


Non Discrimination Testing (cont’d)

Other ways to meet non-discrimination testing

Employer matches 100% of elective deferrals for not highly

compensative employees up to 3% and 50% up to 5%

Employer is required to contribute at least 3% of salary for

non highly compensated employees regardless of

the employee’s participation in 401(k)


Failure of ADP (Actual Deferral Percentage) TestMust 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.

Holding period for 401k contributions (cont’d) 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 under USERRA (Uniformed Services Employment and Reemployment Rights Act of 1994)

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

Small employers can offer a 401(k) option in a SIMPLE plan under Small Business Job Protection Act of 1996


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. Separate accounting requirement. Rollovers must be from another Roth 401(k). 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.

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.o At hire employee must receive notice of auto

election and right to elect to change the amount or opt out altogether.

o 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) Employee’s rights must be non-forfeitable unless

employee fails to pay premiums Plan (other than church plan) must meet non-

discrimination requirements. Plan must offer all employees the chance to defer at

least $200 annually if one employee is given the opportunity.

The elective deferral limits must be met if plan provides for salary reduction agreement.

Tax Shelter Annuities (403 (b) Cont

Tax Shelter Annuities (403 (b) Cont Requirements and Taxability

Has many of the same requirements as 401(k) Employer contributions (e.g. match) are not included

in wages or subject to withholding Employee contributions are not Taxable for Federal

Income Tax and most state income taxes. Employee contributions are Taxable for employment

taxes

Reporting on W-2 Contributions not in box 1 but in boxes 3 & 5.

Contributions also show in box 12 with an “E” Box 13 Retirement plan is checked if there are any

contributions for the tax year

Tax Shelter Annuities (403 (b) Cont

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.

Catch-up special ruleFor employees with as least 15 years of service

with employer.

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)

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 Cont

RulesFunds and earnings in tax-exempt trust for exclusive

benefit of employees and beneficiariesFunds must be transferred within 15 business days

after the month when would have been paid to employees.

Deferrals and earnings remain assets of the employer subject to employer’s general creditors

Tax TreatmentNot subject to federal income tax withholding

Subject to Social Security, Medicare, and FUTA as soon as there is no substantial risk of forfeiture of right to the benefit

IRC 457 Cont

ReportingNot in Box 1 of W-2

In Box 3 and 5 & in Boxes 4 and 6

Box 12 preceded by Code “G”

Employer should not mark check box in Box 13 “Retirement

Plan” based on 457 deferrals

IRC 457 Cont

IRC 457 Cont Distributions Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001

No distributions before employee reaches age 70-1/2

Separation from employment (retirement) or the employee

faces an unforeseeable emergency

Plan may allow early distribution if total amount payable is no

more than $5,000 and

No amount has been deferred within 2 years of the distribution

Distributions are considered pensionEntity distributing has responsibility for withholding and

remitting income taxes

IRC 457 Cont Deferrals can go to a Roth IRA

Small Business Jobs Act (SBJA) of 2010

Beginning in 2011, a governmental 457(b) plan can permit employees who make elective deferrals to the plan to designate some or all of those deferrals as contributions to a Roth IRA.

Contributions are included in employee’s income – subject to all taxation.

IRS offers guidance on 12-month teacher contracts covering shorter terms

Under the anticipated regulations, none of the compensation paid to a teacher would be deferred compensation if the amount the teacher earns during the first calendar year that is paid in the second calendar year does not exceed the elective deferral amount under IRC 402(g)(1)(B) for the first calendar year

Employee Funded Plans - 501(c)

Pension plans created before June 25, 1959 AND are solely funded by employee contributions

Pretax deferral – lesser of $7,000 or 25% of employee’s compensation for the year – not subject to federal withholding

Maximum deferral amount is also reduced by any other pretax contributions to other CODA’s maintained by employer

Reporting Requirements Elective deferrals ARE included in Box 1 of Form W-2 Employee can deduct these amounts on their personal

income tax return Must also be included in Box 3 and Box 5 Elective deferral amount reported in Box 12, code H Employer must mark check box in Box 13 for

retirement plan

Employer sponsored IRA must be in writing and created for exclusive benefit of employees and beneficiaries.

Contribution Limits2011 --$5,000

(Adjusted for inflation to next multiple of $500)Catch-up Provision

Participant must be at least 50 by the end of the year

Additional $1,000 in years 2009 and beyond.

Individual Retirement Account (IRA)

Tax Treatment

Contributions are deductibleReduced if employee or spouse is an active participant

in a qualified retirement plan

Active participant defined in the law Amount of reduction is based on adjusted gross income.

For 2011 the reduction: married employees filing a joint return at

$90,000 single $56,000married filing separately $00.Employee not active participant (but spouse is)

reduction starts at $169,000 for 2011 (married filing joint return) – totally eliminated when AGI hits $179,000

Taxability for deduction totally eliminated at $10,000 over the above limits ($20,000 for joint filers beginning in 2007).

Individual Retirement Account (IRA) Cont

ContributionsEstablished by Taxpayer Relief Act of 1997

Contributions are Taxable No phase-outs because of active plan participant

status, butamount allowed is reduced by contributions by the

individual to other IRAs for that year

For 2011, phased out once individual’s adjusted gross income

exceeds $169,000 for joint filers $107,000 for single filers

Contributions are completely phased out at $179,000 for joint filers $122,000 for single filers

Roth Individual Retirement Account (IRA)

Employers can allow direct deposit of contributionsNo contribution allowed by employerParticipation VoluntaryNo endorsement by employer allowedIRA sponsors publicize direct to employeesContributions are remitted to IRA sponsorEmployer does not receive any kind or consideration.

DistributionsDistributions 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.

Roth Individual Retirement Account (IRA) Cont

Simplified Employee Pensions – 408(k) - SEP

Definition of an SEP:An IRA that meets requirements governing employee participation, nondiscrimination in favor of highly compensated employees, withdrawls, and written formulas to determine employer contributions

Salary reduction agreementUnder the Economic Growth and Tax Relief

Reconciliation Act of 2001 expanded opportunities for retirement savings

Annual increases in amount of elective deferrals

Maximum amount deferred is $16,500 in 2011 Catch up contributions allowed for employees

who would be at least 50 by end of plan year• Lesser of “applicable dollar amount”

($5,500 in 2011) OR employee’s compensation for year reduced by any other elective deferrals made during year

Simplified Employee Pensions – 408(k) – SEP Cont

Other Requirements:

No less than 50% of eligible employees must defer income in the SEP or no one can

Salary reduction option open only to employers with 25 or fewer employees

Not open to public sector employers or tax-exempt organizations

Must meet DP test for nondistrimination applicable to a 401(k)

Plan must have been established prior to January 1, 1997

Total of all contributions (employer & employee) limited to: Lesser of 25% of employee’s annual

compensation OR $49,000 for 2011 with maximum compensation

amount of $245,000 for 2011

Simplified Employee Pensions – 408(k) – SEP Cont

Taxation Requirements: Not subject to federal income tax, Social Security,

Medicare, or FUTA taxes Excess employer contributions included in

employee’s gross wages

Reporting Requirements: Not included in Box 1 of W2 Elective deferrals – include in Boxes 3 & 5 Elective deferrals, including catch-up

contributions, included in Box 12, Code “F” Employer must mark box for “Retirement Plan” Excess deferrals and contributions to be included

in Box 12 total, but not in Box 1; to be reported on Form 1099-R

Savings Incentive Match Plans for Employees of Small Employers (SIMPLE Plans)

Established under the Small Business Job Protection Act of 1996

Can be either an IRA or part of a 401(k) Employer must have no other qualified retirement

plan and no more than 100 employees who received at least $5,000 in compensation

If work force exceeds 100 during preceding year, plan is still eligible for 2 years following the last year it was an eligible employer

Eligible employees: Anyone who received at least $5,000 in compensation from employer during any 2 prior years AND expected to receive at least $5,000 in current year

Contribution limits: $11,500 in 2011 – deferral amount must be

expressed as a percentage of compensation “Catch up” provision - $2,500 for 2011 Employer must match dollar for dollar up to 3%

Savings Incentive Match Plans for Employees of Small Employers (SIMPLE Plans) Cont

Vesting Requirements Fully vested and nonforfeitable when made

Nondiscrimination Testing Must meet the contribution and vesting

requirements to satisfy the special nondiscrimination tests for 401(k) plans in general

Notification Requirements Employees have 60 days before beginning of year

to join or modify their elective deferral amounts Employer must notify employees of right to

participate immediately before the 60 day window Employee can cancel participation in SIMPLE Plan

any time during the year

Savings Incentive Match Plans for Employees of Small Employers (SIMPLE Plans) Cont

Automatic Enrollment Plan can include an automatic contribution

arrangement If Automatic Enrollment is part of plan, Notice

requirements must explain Percentage of compensation if employee does

not make an election Employee’s right to not have default salary

reduction contributions, or to have a different percentage amount

How default contributions will be investedTax Treatment

Not subject to federal tax, but are subject to Social Security, Medicare, and FUTA taxation

Reporting Requirements Not included in Box 1 of W2, but are included in

Boxes 3 and 5 Included in Box 12, Code “D”; “Retirement Plan”

box checked

Defined Contribution Plan

Stock bonus plan or combined stock bonus and money plan designed to invest primarily in the employer’s stock.

Same general requirements as IRC 401(a)Tax Treatment

Employer contributions are not wages and not subject to federal income tax withholding, Social Security, Medicare, or FUTA.

2011 Limitlesser of $49,000 or 100% of compensation.

Employee Stock Ownership (ESOP)

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 limitsCan be discriminatory

Tax TreatmentThe majority of these plans are unfunded Employee has only employer’s promise Funds are not protected from employer’s creditors or

successors.When unfunded:

Amounts are not subject to federal income tax Are subject to Social Security, Medicare, and FUTA.

When distributions are made later, deferrals & subsequent interest are

Subject to federal income tax, Not subject to Social Security, Medicare, or FUTA

American Jobs Creation Act of 2004 restricts nonqualified plans

Non Qualified Deferred Comp Plan

RequirementsWritten planEmployee has a legally binding right to compensation

that has not been actually or constructively received and that is payable in a later year.

Reporting Requirements

Amounts deferred into unfunded plan are reported in Box 3 & 5

Such deferrals are reported in Box 11, if for prior years services

Amounts distributed are reported in Box 1 only

The amounts should be reported in Box 11, if there were no deferrals in the year of distribution.

Non Qualified Deferred Comp Plan Cont

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health, accident & retirement

Documents

employees income

employees spouse

taxable income

employee payments

compensated employees

federal tax purposes

employees domestic partner

federal income tax withholding