HR Support on Taxing Benefits

Editor's Note: Health care reform law and same-sex marriage issues affect payroll.

Rena PirsosOverview: Most employers offer several different types of employee benefits, such as health insurance, sick pay, disability pay, workers' compensation insurance and retirement savings plans. Whether employer and employee contributions and benefit payments received by employees are subject to withholding for certain payroll taxes, such as federal income tax (FIT), Social Security and Medicare (FICA) taxes or federal unemployment (FUTA) tax, varies among benefit types.

Trends: The following important issues will affect the taxation of employee benefits in 2014!

  • Form W-2 reporting of health insurance costs - Regarding Forms W-2, Wage and Tax Statement, that employers are required to provide to employees every January, if an employer provides group health care coverage that is not taxable to employees, it must report the aggregate cost of certain types of coverage on the employees' Forms W-2 to inform them of coverage costs.
  • Additional Medicare tax on high earners - An additional 0.9 percent Medicare tax (AMT) rate applies to single employees who earn more than $200,000 and to married couples who file joint tax returns and earn more than $250,000. For high earners, the total Medicare tax rate is 2.35 percent. For all other employees, the rate is 1.45 percent. The IRS issued final regulations, which apply starting January 1, 2014, governing the implementation of the AMT. The final regulations detail an employer's withholding obligation, and how it should treat repayment by an employee of wage payments received in a prior year for AMT purposes (e.g., sign-on bonuses paid to employees that are subject to repayment if certain conditions are not satisfied).
  • Health flexible spending account (FSA) rules relaxed - The IRS issued a new rule that modifies the "use it or lose it" rule for health FSAs and provides clarification regarding transition relief available for non-calendar year salary reductions. The change to the long-standing "use it or lose it" rule took effect October 31, 2013.
  • Taxation of benefits provided to same-sex spouses - The IRS has issued Notice 2014-1, which further clarifies the various effects of the US Supreme Court's decision in US v. Windsor and IRS Revenue Ruling 2013-17, regarding same-sex marriage, on cafeteria plans, including flexible spending arrangements and health savings accounts. The Notice was issued in question and answer (Q&A) format and provides detailed examples of each scenario covered by the Q&As.

Author: Rena Pirsos, JD, Legal Editor

Latest items in Taxing Benefits

  • Same-Sex Marriage

    Date:
    02 July 2014
    Type:
    Editor's Choice

    Employers are seeing significant changes when it comes to same-sex marriages and other relationships in the workplace. Several states recognize same-sex marriage and extend the same rights and benefits to both same-sex opposite-sex married couples.

  • Same-Sex Marriage Rulings in Arkansas, Idaho, Oregon, Pennsylvania: Employment Law Manual, Quick Reference Chart Updated

    Date:
    04 June 2014
    Type:
    Editor's Choice

    The legalization of same-sex marriage potentially requires employers to provide benefits such as health care coverage and leave time to a broader range of employees, which may also have tax implications.

  • New FAQs Added to Health Care Reform Resource Center

    Date:
    29 May 2014
    Type:
    Editor's Choice

    The FAQs provide answers to some of the most commonly asked questions about the dependent coverage requirements of the Affordable Care Act.

  • IRS Issues Inflation-Adjusted Health Savings Account Limits for 2015

    Date:
    28 April 2014
    Type:
    News

    The Internal Revenue Service has released the calendar year 2015 inflation-adjusted amounts for health savings accounts (HSAs) as determined under § 223 of the Internal Revenue Code.

  • State IRC Conformity: Quick Reference Chart, Minnesota Benefits Content Updated

    Date:
    25 April 2014
    Type:
    Editor's Choice

    State references to the definition of "wages" in the Internal Revenue Code that were recently updated in Iowa, Kentucky, Maine, Minnesota, Nebraska, Oregon, South Carolina and West Virginia have been included in the State Internal Revenue Code Conformity - Chart in the Quick Reference Tool. The Taxation of Employee Compensation: Minnesota section of the Employment Law Manual has also been updated.

  • State Internal Revenue Code Conformity - Chart

    Type:
    Quick Reference

    Some states that require employers to withhold income taxes from employees' wages tie their definitions of "wages" to the federal Internal Revenue Code (IRC). However, many states update their IRC references to a specific date every year or so, while others roll their references into the current version of the IRC. Even with IRC conformity, some states have important exceptions. This Quick Reference Chart summarizes each state's IRC conformity reference.

  • Same-Sex Spouse Treatment Under Retirement Plans: New Guidance Requires Employer Action

    Date:
    14 April 2014
    Type:
    News

    The IRS issued Notice 2014-19 and related Frequently Asked Questions providing guidance on how qualified retirement plans should treat same-sex spouses following the Supreme Court's decision in United States v. Windsor. Employers must take action to ensure that plan documents and operations conform to requirements.

  • Taxation of Employee Compensation

    Type:
    Employment Law Manual

    Employees' salary and fringe benefits are subject to federal income taxes, Social Security and Medicare taxes, and federal unemployment insurance tax. However, certain cash and noncash fringe benefits may be offered to employees on a tax-free basis, while an otherwise tax-free fringe benefit becomes taxable compensation to employees if employers do not meet the rules for that particular fringe benefit .This section assists HR professionals in determining which fringe benefits (e.g., company car, health benefits) and other compensation (e.g., bonuses, awards) are taxable or not.

  • Taxation of Benefits Provided to Same-Sex Couples: Federal Guidance and 18 New State Sections Now Available

    Date:
    10 March 2014
    Type:
    Editor's Choice

    Eighteen states have been added to the Taxation of Benefits section of the Employment Law Manual and existing states have been updated to reflect the current status of the taxation of health insurance benefits provided by an employer to an employee's same-sex spouse, civil union partner or domestic partner in all states that impose an income tax.

  • Federal and State Tax Treatment of Same-Sex Couple Benefits - Chart

    Type:
    Quick Reference

    Despite the DOMA decision handed down by the Supreme Court in Windsor, state laws still vary greatly regarding both the recognition of same-sex marriage and the taxation of benefits provided to an employee's same-sex spouse by an employer. This Quick Reference Chart summarizes federal and state law regarding whether same-sex marriages, civil unions and/or domestic partnerships are recognized, and whether the value of benefits provided by an employer to an employee's same-sex spouse or civil union or domestic partner is taxable. This chart will be updated when any changes in these laws occur.