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 Bans Ruled Unconstitutional in Colorado, Indiana, Virginia: Employment Law Manual Updated

    Date:
    13 August 2014
    Type:
    Editor's Choice

    Courts in Colorado, Indiana and Virginia have held that state laws banning same-sex marriage are unconstitutional. However, each decision has been stayed and same-sex couples in these states currently cannot get married.

  • Taxation of Employee Benefits

    Type:
    Employment Law Manual

    Employee benefits, such as health insurance, sick pay, disability pay, workers' compensation insurance and retirement savings plans, may be subject to withholding for federal income taxes (FIT), Social Security and Medicare (FICA) taxes or federal unemployment (FUTA) taxes. This section assists HR professionals in understanding how each particular type of benefit plan must be structured and how to properly tax and report contributions, reimbursements and distributions in order to ensure compliance with the Internal Revenue Code.

  • Truncated Taxpayer ID Number Regulations Finalized: Employment Law Manual Updated

    Date:
    08 August 2014
    Type:
    Editor's Choice

    To prevent identity theft, the IRS has issued final regulations permitting the use of Truncated Taxpayer Identification Numbers (TTINs) on certain federal tax-related payee statements, but not on Form W-2.

  • 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.