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 TreatmentNon-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.

• Coverage for “adult children” (under age 27 by end of taxable year) – married or unmarried. Plan cannot define “dependent” for purposes of eligibility other than relationship between child & participant. No coverage for grandchildren allowed

− Domestic/Life Partners• 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.


− Change in definition of “Medical Expenses”• Applies for purposes of direct reimbursement of

employee expenses or indirect reimbursements through FSAs, HRAs, and Archer MSAs.° Only costs of medicines prescribed by a doctor

and insulin are eligible. Change only affects over-the-counter medicines unless doctor prescribes with a written prescription – for tax years beginning 2011

Taxes Involved− Federal Income Tax

• Employment Taxes◦ Social Security◦ Medicare ◦ FUTA

Based on one of the following• Plan is written• Referred to in employment contract• Employees contribute to the plan• Employer contributions are made to a separate

fund• Employer is required to contribute


Exclusion from Social Security , Medicare & FUTA must:

• Employer-paid physical exams – NOT excluded from income as a working condition fringe benefit, but IS excluded from income as an employer-paid medical care expense

• 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).


Patient Protection and Affordable Care Act – effective for plan years beginning on or after September 23, 2010

− If insurance is provided through third party insurance company there is no nondiscrimination 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

Non Discriminatory PlanSelf-insured plan must benefit:

• At least 70% of all employees• At least 80% of employees eligible to

participate in the plan (IF at least 70% of all employees are eligible to participate)

• A classification of employees that the Secretary of the Treasury finds not to be discriminatory

• If all benefits provided to highly compensated employees are provided for all other participating employees

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 officers• Owner of more than 10% of employer’s

stock• Top-paid 25% of employees

Discriminatory Plan

W-2 Reporting of employer-sponsored health coveragePatient Protection and Affordable Care Act

• Requires employers to report the total cost of employer-sponsored health coverage on employees Forms W-2. Applies to Forms W-2 for 2012 for first time.

• For informational purposes only◦ To inform employees of the cost of their health

care coverage◦ Does NOT cause excludable employer-sponsored

health care coverage to become taxable◦ Aggregate reportable employer cost reported on

W-2 in box 12, code DD◦ No reporting on Form W-3

• Reporting exceptions for 2012 W-2’s:◦ If employer filed less than 250 W-2’s for preceding

calendar year◦ If employee terms and requests a W-2 before end

of calendar year

W-2 Reporting of employer-sponsored health coverageDefinitions to know (pages 4-12 thru 4-18)

• Aggregate Cost – total cost of coverage under all applicable employer-sponsored coverage provided to employee

• Applicable employer-sponsored coverage – coverage under any group health plan made available to employee by employer that is excludable from employee’s gross income – see exceptions (p. 4-12 & 4-13)

• Group health plans – A plan of, or contributed to by, an employer or employee organization to provide health care to employees, former employees, the employer, others associated or formerly associated with the employer in a business relationship, or their families

• Aggregate reportable cost – Includes both the portion of the cost paid by the employer and the portion of the cost paid by the employee, regardless of pre-tax or after-tax contributions

W-2 Reporting of employer-sponsored health coverageDefinitions to know (continued)• Not included in the aggregate reportable cost –

◦ Archer medical savings account◦ Health savings account◦ Multiemployer plan (IE: amounts contributed to a union

plan)◦ Health reimbursement arrangement◦ Health flexible spending arrangement◦ Dental or vision plan (if plan is offered under a separate

policy, certificate, or contract of insurance)◦ Cost of coverage under hospital indemnity or other fixed

indemnity insurance (UNLESS employee purchases policy on a pre-tax basis under a Section 125 plan OR employer makes any contribution to the cost of coverage that is excludable

◦ Self-insured plan not subject to COBRA◦ Plan primarily for the military◦ Excess reimbursements◦ Coverage provided under an EAP, wellness program, or on-

site medical clinic

W-2 Reporting of employer-sponsored health coverage

Definitions to know (continued)• Methods of calculating the cost of coverage –

◦ COBRA applicable premium method◦ Premium charged method◦ Modified COBRA premium method◦ Composite rate◦ Employer provides some benefits that are employer-

sponsored coverage and others that are not◦ Cost changes during the year◦ Employee begins, changes, or terminates coverage during

the year◦ Adjustments for events after end of calendar year◦ Coverage period that includes December 31st and

continues into the subsequent calendar year◦ Transition relief

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 2012 annual deductible • $2,100 – $3,150 for individual • $4,200 - $6,300 for familyMaximum out-of-pocket expenses can be no more than • $4,200 for individual coverage • $7,650 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

− Cannot be part of a Cafeteria Plan− Distributions from MSAs are excluded from income

if they are for medical expenses incurred by employee or his/her dependents• Covered medical expenses don’t include

premiums for insurance (other than long-term care), for health care under COBRA, or for health care coverage while receiving unemployment insurance benefits

• 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 20% 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


Reporting Requirements:

Employer Contributions• Box 12 R on W-2, code R• Plan trustees report on 5498-SA• Reported on employee’s personal tax return

Employee Deductions• Box 1, 3 and 5 on W-2• Employee takes deduction on personal income

tax return for amount contributed• Plan trustees report on 5498-SA

Distributions• Plan trustees report on 1099-SA


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 $310/day in

2012 (indexed for inflation)◦ Excess will be excluded to the extent of actual

cost of care

Long Term Care Insurance

Restrictions• Not subject to COBRA• Cannot be part of Cafeteria Plan• If part of flexible spending arrangement it is

included in employee’s taxable income

Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)

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

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

• Coverage period generally is 18 to 36 months

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 months• Covered employee’s termination of employment or

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

– 24 months◦ If another qualifying event occurs (other than

employer’s bankruptcy) period extends to 36 months.◦ Qualified beneficiary (employee or dependent) is

disabled under Social Security Act during the first 60 days of continued coverage - 29 months− If another qualifying event during 29 months (other

than employer bankruptcy) coverage extends to 36 months

• Employer filed bankruptcy – life of retiree or retiree’s spouse

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

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

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

• (date of divorce is the qualifying event) – 36 months

• Dependent child losing that status – 36 monthsPremium 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 provisions• Election period must last at least 60 days from the

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

• Plan must provide written notice of COBRA continuation coverage 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 Noncompliance• Employers subject to $100 per day penalty for each

qualified beneficiary (maximum $200 per day per family affected by same qualifying event).

◦ Penalty will not be imposed if failure is due to reasonable cause and is corrected within 30 days of discovery

◦ Unintentional failures due to reasonable cause – maximum penalty is lesser of 10% of employer premiums for group health plans during preceding taxable year to $500,000



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 & Subsidies• American 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 eligibility◦ End of maximum required period of COBRA

continuation coverage◦ Date the individual becomes eligible for Medicare

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

◦ Subsidy may be available beyond August 31, 2011• Employee must notify plan upon eligibility for other

coverage• Individual can appeal denial of subsidy


• Regular COBRA continuation notice must now also include:◦ Description of beneficiary’s right to premium

reduction◦ Forms necessary to establish eligibility & apply for

premium reduction◦ Contact information for group health plan

administrator◦ Description 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


• Extension of eligibility period to February 28, 2010 and 9 months COBRA subsidy period extended to 15 months – Dept of Defense Appropriations Act, 2010, Temporary Extension Act of 2010 and Continuing Extension Act of 2010

• 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 coverage− Cannot be a flexible spending arrangement− Cannot 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 and adult children until the year they reach age 27).

• 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)

• Reimbursements can be paid with debit and credit cards – substantiation procedures exist and must be met

Health Reimbursement Arrangements (HRA)

Health Reimbursement Arrangements (HRA) Cont’d

Benefits under HRA:

• Generally excluded from employee’s gross income• Qualifications for exclusion:

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

◦ Expenses must be substantiated◦ Expenses may not be for prior taxable year,

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

• If amount credited to a reimbursement arrangement is directly or indirectly based on amount forfeited under a Sect 125 flex plan, arrangement is treated as funded by salary reduction

Qualifications for exclusion• No 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 determination• If salary reduction election for coverage period

exceeds the actual cost of the accident or health plan coverage for that period, salary reduction is attributable to HRA – Look to COBRA rates for this.◦ If correlation exists between maximum

reimbursement amount available and amount of salary reduction election for accident and health plan then reduction is attributable to HRA


HRAs and Flexible Spending Accounts (FSAs)

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

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

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

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



Nondiscrimination rules applicable to HRAs

Section 105(h) same as for self-insured medical reimbursement 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’d

Qualifications for exclusion

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

• Annual deductible for 2012 ◦ at least $1,200 for individual coverage

• out of pocket expense limits no more than $6,050

◦ $2,400 for family coverage • out of pocket no more than $12,100 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 network

Contributions• Contributions can be made by the employer and employee

• All contributions are aggregated for purposes of maximum contribution limit.

• Contributions to Archer MSAs reduce the limit available for HSA for tax exclusion

• Any amount over the limit is includable in gross income◦ There 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 2012 maximum is • $3,100 for an individual • $6,250 for a family

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

• For 2009 and beyond $1,000



Contributions (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 IRAanother 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 30 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. Transfer 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 HRA, FSA, or IRA are treated as rollover contributions and are non taxable

◦ EXCEPTION: If employee is not an eligible individual with coverage under an HDHP at any time during the prior 12 months beginning with the month of the HSA distribution; if employee cannot meet the requirements, distribution is included in gross income and employee is subject to additional tax equal to 10% of distribution unless reason for ineligibility is employee’s death or disability)

• Transfer provision not applicable to SEP’s or SIMPLE retirement accounts

• HSA and HDHP can be included in a Cafeteria Plan

• HSAs are not subject to COBRA continuation coverage

• Employer can make larger contributions to non-highly compensated employees’ HSA’s beginning in 2007

Calculating Comparable Contributions• Sect 4980G mandates use of calendar year for

comparability testing purposes

• Several ways to comply with testing requirements:◦ Pay-as-you-go basis◦ Look-back basis◦ Pre-funded basis

• Impermissible Contribution Methods do exist!



Penalty for not making comparable contributions to all employees’ HSA’s is an excise tax equal to 35% of all amounts employer contributed during the calendar year

Distributions• Excluded from gross income if for qualified medical

expenses of employee, spouse or dependents not covered by other insurance

• 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 HRA• Suspended HRA• Post-deductible health FSA or HRA• Retirement HRA


Effect of FSA grace period on HSA 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 period• Mandatory 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 12 with Code “W” 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 ‘d• Applies to private sector employers and public sector

employees with 50 or more employees (including part-time and employees on leave or suspension, but not laid-off employees

• For public sector (government) employees and public elementary and secondary schools – no limit on employees or distance between locations

• 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

consecutive◦ Employment 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 Reserve• Period of approved absence or unpaid leave

Family Medical Leave Act (FMLA) Cont ‘d• Expatriates are not covered

• Employer decides what constitutes a 12 mo period – must be consistent; if employer policy is not clear, what favors employee

• CA & NJ require FMLA

• Employer can require employee to take leave

• “Serious Health Condition” defined in FMLA regulations

• Intermittent leave◦ Can be several days or weeks at a time or by

working reduced hours◦ Reduced hours can be deducted from an exempt

employee’s salary without jeopardizing exempt status

◦ If 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 ‘d

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.


• 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 designations◦ How 12 mo period and “single 12-mo period” are

determined◦ Employee certification requirements◦ Substitution of paid leave for unpaid leave◦ Premium payment requirements to maintain health

benefits◦ Job restoration rights, including effect of a “key

employee” designation◦ Potential liability for health insurance premiums if

employee does not return to work


• Consequences exist for employer’s failure to follow FMLA notice requirements

• There is a notice requirement for employees◦ If medical treatment is foreseeable, 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 basis◦ Employer can require any employee premiums◦ If 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


• Job guarantee upon return from leave – either previous job or one that is “equivalent” with no loss of pay or benefits◦ Employer 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 Requirements◦ Basic payroll records – hours worked, rate of pay,

deductions from wages◦ Records detailing dates and amount of FMLA leave

taken◦ Copies of notices and documents related to FMLA

leave


• 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 plans◦ Employee is responsible for their share of

premiums of group health plan during leave◦ Cafeteria plan may offer one or more of the

following 3 payment options• Pre-Pay• Pay-As-You-Go• Catch-up

Sick Leave Pay• Paid by employer from regular payroll account

Taxable as regular income• Worker’s Compensation is different!

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-insured• Employer withholds taxes based on employee’s

most recent W-4• Employer withholds and pays employer share of

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

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

Sick Pay Cont ‘d

Responsibility for income withholding and employment taxes

• Payments made by employer’s agent OR employer is self insured.◦ Agent may withhold FIT at 25% in 2010◦ 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 ‘d

Sick Pay Cont ‘d

Reporting Responsibilities• Employer makes payments

◦ Report taxable amounts on Form 941◦ Report income tax withheld on Form 941◦ Report taxable amounts to employee on Form

W-2◦ Report payments on Form 940

• Employer’s agent makes payments◦ Usually employer retains reporting

responsibilities

• Third-party insurer makes payments◦ Both 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 FUTA◦ On or after employment relationship has

terminated because of death or disability retirement

◦ Employee receiving disability insurance benefits under the Social Security Act – still subject to FUTA

Sick Pay Cont ‘d

Form of insurance employers are required to buy to insulate them from lawsuits brought by employees who are hurt or become ill while working.

• Benefit payments – not included in gross income or subject to• any employment taxes

• Premium payments – paid by employer based on specific earnings and classifications

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

• National Council States (38 states plus District of Columbia)

• Non-National Council States (7 states)• Monopolistic States (5 states)• Competitive State Funds (12 National Council

States)

Workers Compensation Insurance

Workers Compensation Insurance Cont’d• Employers are assigned Classification Codes based on the

type of business◦ There 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 premium• Reimbursed travel expenses• Third-party sick pay• Reimbursed moving expenses• Tips• Personal use of company-provided vehicle• Group Term Life Insurance over $50,000.• Severance Pay• Education Assistance Payments• Employer 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 plans• Coverage under dependent care assistance plans• Group Term Life insurance on lives of employees• Qualified adoption assistance• Premiums for COBRA continuation coverage• Accidental death & dismemberment insurance• Long-term and short-term disability coverage• A 401(k) plan• Contributions to HSA

Cafeteria Plans Cont’d

Exceptions to qualified non-taxable benefits would be:• Scholarships and fellowships• Nontaxable fringe benefits under IRC Section 132• Educational Assistance• Meals and lodging furnished for the benefit of the

employer• Employer contributions to Archer MSAs• Long-term care insurance (unless purchased with

funds from a HSA offered as a qualified benefit)• Group-term life insurance on the life of anyone other

than an employee• Health Reimbursement Arrangements that allow any

unused amount to be carried over to the next coverage period to increase the maximum reimbursement amount

• Elective deferrals to a Section 403(b) plan


Reasons a plan would fail to satisfy Section 125 requirements:

• Offering nonqualified benefits• Not offering an election between at least one

permitted taxable benefit and at least one qualified benefit

• Deferring compensation• Failing to comply with the uniform coverage rule or

use-or-lose rule• Allowing employees to revoke elections or make new

elections during a plan year (except as allowed by law)

• Failing to comply with substantiation requirements• Paying or reimbursing expenses incurred for

qualified benefits before the effective date of the cafeteria plan or before a period of coverage

• Allocating experience gains other than expressly allowed by law

• Failing to comply with grace period rules

Cafeteria Plans Cont’d• Premium-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 plansEXCEPTIONS

◦ 401(k)◦ Educational institution contributions for

postretirement group-term life insurance◦ Amounts remaining in a HSA at end of calendar

year◦ Benefits under a long-term disability policy

relating to more than one year◦ Mandatory two-year election for vision or dental◦ Using salary reduction amounts to pay premiums

for the 1st month of the next plan year◦ Purchase of additional time off carried over to

next year

Cafeteria Plans Cont’dCafeteria 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.(See page 4-70)

Cafeteria Plans Cont’dBenefit 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 changes• Changes in the number of dependents• Employment status changes (applies to employee,

spouse, or dependent)• Change in dependent status• Residence change• Adoptions

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 Cont’dSpecial Exceptions

• COBRA• Medical Support orders• Medicare or Medicaid eligibility• Special enrollment rights under HIPPA• Elective deferrals under a CODA• FMLA 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 Cont’dParticipation in a Cafeteria Plan must be restricted to employees and the plan must be maintained for their benefit.

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 tests◦ Eligibility test◦ Contributions and benefits test◦ Concentration test

• Special health benefits test

• Separate tests allowed for new employees

• Testing must be performed at year-end

Cafeteria Plans Cont’dFlexible 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 meet◦ Elections cover a full plan year◦ Limit of $2,500. beginning in 2013◦ No deferred compensation – “use it or lose it”◦ Plan can allow a “grace period” up to 2 ½ months◦ Unused balances can be distributed to reservists –◦ “qualified reservist distributions” allowable if

employer decides to include it in the cafeteria plan◦ Uniform coverage throughout coverage period◦ 12 month period of coverage◦ Prohibited reimbursements; claim substantiation;

claims incurred◦ Limiting health FSA enrollment to health plan

participants

Cafeteria Plans Cont’dFlexible Spending Arrangements (FSA’s) (cont’d)• Specific Requirements (continued):

◦ Reimbursements must be for medical expenses – health care reform legislation has changed the definition of medical expenses – only cost of medicines prescribed by a doctor and insulin (for over-the-counter drugs, doctor must provide a prescription to qualify for FSA)

• 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◦ After 1/15/11, FSA debit cards may not be used to

purchase over-the-counter medicines or drugs unless specific IRS rules are followed

• Special dependent care assistance rules


Tax Treatment of Cafeteria Plans• Employer contributions are excluded from employee’s

income – not subject to federal withholding or employment taxes

• Pre-Tax contributions made by employee are excluded from employee’s income – not subject to federal withholding, Social Security, Medicare and FUTA taxes (401(k) plan pre-tax contributions are subject to Social Security, Medicare, and FUTA taxes)

• Group-term life insurance – first $50,000. is not taxable

• After-tax contributions – totally taxable

W-2 Reporting• 401(k) – does not reduce Social Security or Medicare

taxable wages; report amount of 401(k) deferral in Box 12, Code “D”

• Dependent care assistance – report amount in Box 10

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 457• Employee-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 Plans• Nonqualified Deferred Compensation Plans

Retirement and Deferred Compensation Plans Cont’d

Qualified Pension and Profit Sharing Plans – 401(a)

• Defined Benefit Plans◦ Benefit to employee based on age, compensation

level and length of service◦ Employer required to make contributions to plan

sufficient to provide level of benefits earned by employee

• 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.

◦ Payroll maintains records of hours worked, compensation earned, dates of birth and hire date

• Types of 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)

Retirement and Deferred Compensation Plans Cont’d

• Annual Compensation and Contribution Limits◦ Set by Economic Growth and Tax Relief Reconciliation Act

of 2001 (EGTRRA)◦ For 2012 annual compensation limit is $250,000 (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 $50,000 in 2012 (indexed annually) or 100% of employee’s annual compensation.

◦ Pre-tax elective deferrals to 401(k), 403(b), 457, 125, 132(f)(4) are included in employee’s contribution to determine the limit.

Qualified Pension and Profit Sharing Plans 401 (a)

• Tax Treatment of Pension and Profit Sharing Plans◦ Qualified Plan – meets certain requirements under IRC

401(a) regarding participation, vesting, contribution limits, benefit limits, and nondiscrimination in favor of highly compensated employees.• Employer contributions are excluded from wages and

are not subject to federal income tax withholding, or Employment taxes.

• Employee after-tax contributions are included in income and taxable whether voluntary or required.

Cash or Deferred Arrangements (CODA)• Voluntary Salary Reduction Plan – 401(k)

◦ Pension Protection Act of 2006 put ability to automatically enroll employees in 401(k) plan into the law for plan years starting after 12/31/07• Must provide specific schedule of automatic

contribution. It must be at least 3% at hire and may stay at that level until the beginning of the second year after hire.

• Increases must be at least 1% each year up to 6% for fourth. The arrangement can specify larger percents up to 10% of compensation.

• If employer matches contributions, the plan must provide 100% match for first 1%; plus 50% for contributions between 2% and 6% or non-elective contribution of at least 3% of compensation – cannot contribute at high percent for highly compensated employees and cannot match contributions over 6%.

◦ When hired employees must have 90 days to withdraw from automatic elections and recover contributions from the plan. Employees can change or stop future contributions at any time.

Contribution Limits for 401(k)• 2012 contribution limit is $17,000

◦ 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)

Catch-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 SIMPLE

◦ 2012 catch-up limit is $5,500◦ Adjusted for inflation in $500 increments

• SIMPLE “catch-up” ◦ limit is $2,500 in 2012◦ Adjusted for inflation in $500 increments

Non Discrimination Testing• Must not discriminate in favor of highly compensated

employees◦ 5% owner of stock or capital◦ Annual compensation over $115,000 in 2012 or top

paid 20% of employees• Other Contributions can be included• “Catch-up” Contributions are not counted.• At least 70% of non-highly compensated employees

must be eligible or the % of non-highly compensated eligible employees is at least 70% of the percentage of eligible highly compensated employees.


Failure of ADP (Actual Deferral Percentage) Test• Must distribute some elective deferrals and earnings to highly

compensated employees within certain period and report on 1099-R


Holding period for 401k contributions• In 1996 the Labor Dept. shortened the maximum holding

period for 401(k) contributions from 90 days to the 15th business day of the month following the month during which the amount would have been paid to the employee.

• Employers who cannot meet the deadline can have an extra 10 business days, but must provide reasons for the delay.

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)

• Early Distribution Penalty◦ If employee receives a distribution before retirement

(with exceptions) there is a 10% excise tax on the taxable portion of the distribution.

• Veterans can make deferrals for years spent in military service◦ Extra deferrals can be made for up to three times the

period of military service (not to exceed 5 years)◦ Separate reporting requirements◦ Not included in non-discrimination tests


Roth 401(k)

• Starting in 2006 employers may permit employees to designate some or all of the contributions as Roth 401(k)◦ The contributions are made with after-tax dollars.◦ The earnings from the eventual distribution will be

tax exempt.◦ All 401(k) contributions (both pre-tax and Roth) are

taken into account for limits and anti-discrimination testing.

• Small Business Jobs Act of 2010 – allows participants in 401(k), 403 (b) and 457 plans with a qualified designated Roth contribution program to roll over amounts distributed from these plans to designated Roth accounts – effective September 27, 2010

• 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◦ Employer can offer a 401(k) program IF it existed

before the Tax Reform Act of 1986• Automatic salary reductions

◦ Can qualify as elective deferrals◦ Newly hired employee, who does not make an election

can have automatic 4% deductions toward purchase of annuity.• At hire employee must receive notice of auto

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

• Every year employee notified of reduction percentage and their right to change it, including procedure and timing for doing so.

• Requirements◦ Annuity contract may not be purchased through a

qualified annuity plan under Section 403(a)◦ 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)• 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

• Excess deferrals included in box 12 but NOT included in box 1. ◦ Reported on 1099-R.

• Deferrals can go to a Roth beginning in 2006


• 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 rule◦ For employees with as least 15 years of service with

employer.

IRC 457 (b)

• 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 (b)

Rules• Funds and earnings in tax-exempt trust for exclusive

benefit of employees and beneficiaries◦ Funds must be transferred within 15 business days

after the month when would have been paid to employees.

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

Tax Treatment• Not 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

Reporting• Not 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 (b)

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 pension

◦ Entity distributing has responsibility for withholding and remitting income taxes

◦ Reported on 1099-R – Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc

◦ Distributions under a non-governmental plan – reported on W2, box 1 and box 11

◦ Under the Small Business Jobs Act of 2010, deferrals can go to a Roth IRA beginning in 2011; subject to federal, Social Security, Medicare and FUTA taxation

IRC 457(b)

Employee-Funded Plans – 501(c)(18)(D)• Pension plans created before June 25, 1959 and funded

solely by employee contributions◦ Does not discriminate in favor of highly-compensated

employees◦ Deferrals are excluded from Income

• Taxation requirements◦ Not subject to federal tax withholding◦ IS subject to Social Security and Medicare

withholding and is reportable for FUTA taxation

• W-2 Reporting requirements◦ Deferrals included in box 1 and box 12, code “H”◦ Check box 13 for “Retirement Plan”

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

• Contribution Limits◦ 2012 --$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 2012 and beyond.

Individual Retirement Account (IRA)

Tax Treatment• Contributions are deductible

◦ Reduced if employee or spouse is an active participant in a qualified retirement plan

◦ Amount of reduction is based on adjusted gross income. For 2009 the reduction:

• married employees filing a joint return at $92,000

• single $58,000• married filing separately $00.

◦ Employee not active participant (but spouse is) reduction starts at $173,000 for 2012 (married filing joint return)

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

◦ Employer contributions included in income, but not subject to federal withholding up to the amount the employer reasonably believes the employee will deduct on their personal 1040 form; totally taxable for Social Security, Medicare and FUTA

Individual Retirement Account (IRA)

Contributions• Established by Taxpayer Relief Act of 1997

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

status, but amount allowed is reduced by contributions by the individual to other IRAs for that year

• For 2012, deductions begin to be phased out once individual’s adjusted gross income exceeds ◦ $173,000 for joint filers ◦ $110,000 for single filer

• For 2012, contributions are completely phased out at ◦ $183,000 for joint filers ◦ $125,000 for single filers.

Roth Individual Retirement Account (IRA)

• Employers can allow direct deposit of contributions◦ No contribution allowed by employer◦ Participation Voluntary◦ No endorsement by employer allowed◦ IRA sponsors publicize direct to employees◦ Contributions are remitted to IRA sponsor◦ Employer does not receive any kind or

consideration.

• Distributions◦ Distributions are not included in gross income

• If made no sooner than 5 years after first contribution and

• Made on or after age 59-1/2, death, disability, or used for a first time home purchase.

Roth Individual Retirement Account (IRA)

Simplified Employee Pensions – 408(k)

Commonly known as an SEP• An IRA that meets requirements governing:

◦ Employee participation◦ Non-discrimination in favor of highly compensated

employees’ withdrawls◦ Written formula to determine employer

contributions• Employer must make contributions

◦ On behalf of all employees age 21 and over◦ Employees that worked for employer at least 3 of

the last 5 years◦ Employees that earned at least $550. in 2012

• Contribution must be made based on the same compensation-related formula for all employees up to $250,000. in compensation in 2012

• W-2 Reporting◦ Not in box 1; In box 12, code “F”; check box 13 for

“Retirement Plan”

Savings Incentive Match Plans for Employees of Small Employers

(SIMPLE Plans)Contribution Limits and Requirements• Employee can elect to defer $11,500 in 2012• Deferral amount must be expressed as a percentage of

compensation• “Catch up” contributions allowed for employees age 50 or

older by end of plan year• Employer must match employee’s elective deferral dollar-

for-dollar up to 3%◦ Employer may make a nonelective contribution of 2%

of each eligible employees’ compensation – employee must have at least $5,000. in compensation for that year and employee doesn’t have to defer any salary

• All employee elective deferrals and employer matching and nonelective contributions must be fully vested and nonforfeitable when made

• Employees have between Nov 2 and Dec 31 to participate in SIMPLE plan for next year or modify their elective deferral amounts

Savings Incentive Match Plans for Employees of Small Employers

(SIMPLE Plans)• SIMPLE IRA plan can include an automatic contribution

arrangement if employee does not make an affirmative election

• Tax treatment◦ Not subject to federal withholding◦ Subject to Social Security, Medicare, and FUTA taxes◦ Employer matching and nonelective contributions are

not subject to taxation• W-2 Reporting Requirements

◦ Deferrals not included in box 1◦ Deferrals reported in box 12, Code “S”◦ Check box 13 for “Retirement Plan”

• 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.

◦ 2012 Limit: lesser of $50,000 or 100% of compensation

Employee Stock Ownership (ESOP)

American Jobs Creation Act of 2004 created IRC Section 409A which places significant restrictions on nonqualified deferred compensation plans• Tightened rules governing inclusion of deferrals in gross

income for federal income tax purposes• Expanded the types of compensation plans and

arrangements• Employee has a legally binding right during a taxable

year to compensation that has not been actually or constructively received and included in gross income and is payable to him or her in a later year

Emergency Economic Stabilization Act of 2008 created IRC Section 457A which provides that any compensation deferred under a nonqualified deferred compensation plan of a nonqualified entity is includible in the employee’s gross income where there is no substantial risk of forfeiture of the right to such compensation

Non Qualified Deferred Comp Plan

• Employer plan to defer compensation to a later date which may or may not coincide with retirement.

• Plans can be either funded or unfunded ◦ If unfunded, employee has only employer’s promise of

money◦ If funded, contributions & earnings based on them are

wages subject to federal income tax withholding when the employee’s interest is vested

• The majority of these plans are unfunded ◦ Funds are not protected from employer’s creditors or

successorsIf a nonqualified deferred compensation plan does not conform to the restrictions of IRC Section 409A, all amounts deferred and other vested amounts, plus earnings on those amounts, are subject to federal income tax and an additional tax of 20% of the amount included in income. In addition, interest will be charged on underpaid taxes, calculated at the IRS underpayment rate plus 1%


Non Qualified Deferred Comp PlanTax Treatment• Any deferrals or earnings included in income because of

the new rules in Section 409A are subject to federal income tax withholding and should be treated as supplemental wages

• All amounts deferred under one or more nonqualified deferred compensation plan in a calendar year of more than $600 must be reported by the employer on Form W-2, whether or not the amounts are included in income for that year; report in Box 12, Code “Y” – Notice 2008-115 nullifies this requirement until further guidance is issued

• Amounts required to be included in income must be reported on Form W-2 in Box 1 and in Box 12, Code “Z”. Amount in Box 12 should include all amounts deferred under the plan for the taxable hear AND all preceding taxable years (plus earnings) that are currently includible in gross income under Section 409A

Reporting Requirements• Amounts deferred into plan are reported in Box 12, code

“Y”• 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• Any deferrals/earnings included in income because of the

new rules in 409A are subject to federal income tax withholding and taxed as supplemental wages

Calculating the amount includible in income upon a failure to meet the requirements of Section 409A1. Determine total amount deferred2. Calculate portion of total amount deferred that is either

subject to a substantial risk of forfeiture or has been included in income in a previous year

3. Subtract amount determined in step 2 from step 1 – excess is includible in income and subject to additional income taxes


Non Qualified Deferred Comp PlanTax Treatments of Employer Contributions• Doesn’t matter if plan is funded or unfunded• Employer contributions & earnings are subject to Social

Security, Medicare and FUTA taxes on the later of:◦ Date services are performed that form the basis for

the contributions; OR◦ When there is no substantial risk of forfeiture of the

employee’s interest in the funds

Reporting Requirements• Employer contributions to an unfunded nonqualified

deferred compensation plan are not included in income• Amounts deferred to a funded, secured plan are income

if employee has no risk of losing the benefits; must be reported in Box 1 and Box 11

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Health, Accident & Retirement

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