Health, Accident & Retirement
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Transcript of 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.
Health & Accident Insurance Contribution- Tax Treatment Cont.
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.
Health & Accident Insurance Contribution- Tax Treatment Cont.
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.
Medical Savings Accounts (Archer MSA) Cont.
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
Medical Savings Accounts (Archer MSA) Cont.
• 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
Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) Cont.
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.
Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) Cont.
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
Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) Cont.
Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) Cont.
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
American Recovery and Reinvestment Act of 2009 (AARA) Cont.
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
American Recovery and Reinvestment Act of 2009 (AARA) Cont.
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
American Recovery and Reinvestment Act of 2009 (AARA) Cont.
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.
Health Reimbursement Arrangements (HRA) Contd
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)
Health Reimbursement Arrangements (HRA) Contd
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.
Health Reimbursement Arrangements (HRA) Cont
Health Reimbursement Arrangements (HRA) Cont
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
Health Savings Accounts (HSA ) Cont
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 ) Cont
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.
Health Savings Accounts (HSA ) Cont
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 ) Cont
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.
Health Savings Accounts (HSA ) Cont
Health Savings Accounts (HSA ) Cont
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
Health Savings Accounts (HSA ) Cont
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
Health Savings Accounts (HSA ) Cont
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
Health Savings Accounts (HSA ) Cont
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.
Cash or Deferred Arrangements (CODA) Cont
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)
Cash or Deferred Arrangements (CODA) Cont
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
Cash or Deferred Arrangements (CODA) Cont
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
Cash or Deferred Arrangements (CODA) Cont
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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