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

  • Courts Continue to Rule on Same-Sex Marriage: Employment Law Manual, Charts Updated

    Date:
    25 November 2014
    Type:
    Editor's Choice

    Courts declared same-sex marriage bans unconstitutional in Kansas, Missouri, Montana and South Carolina. The 6th Circuit Court of Appeals upheld same-sex marriage bans in Kentucky, Michigan, Ohio and Tennessee.

  • 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.

  • Tax Treatment of Same-Sex Couple Benefits by State

    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.

  • Taxation of Employee Benefits: South Carolina

    Type:
    Employment Law Manual

    The value of health insurance benefits provided to an employee's same-sex spouse or partner and/or their dependents is taxable in South Carolina.

  • Taxation of Employee Benefits: Missouri

    Type:
    Employment Law Manual

    The value of health insurance benefits provided to an employee's same-sex spouse or partner and/or their dependents is taxable in Missouri.

  • Taxation of Employee Benefits: Michigan

    Type:
    Employment Law Manual

    The value of health insurance benefits provided to an employee's same-sex spouse or partner and/or their dependents is taxable in Michigan

  • Taxation of Employee Benefits: Kansas

    Type:
    Employment Law Manual

    In-depth review of the spectrum of Kansas employment law requirements HR must follow with respect to taxation of employee benefits.

  • Taxation of Employee Benefits: Kentucky

    Type:
    Employment Law Manual

    In-depth review of the spectrum of Kentucky employment law requirements HR must follow with respect to taxation of employee benefits.

  • Taxation of Employee Benefits: Ohio

    Type:
    Employment Law Manual

    In-depth review of the spectrum of Ohio employment law requirements HR must follow with respect to taxation of employee benefits.

  • Annual Retirement Plan COLAs and Fringe Benefit Limitations

    Type:
    Quick Reference

    This chart provides employers with a comparison of the current and prior year retirement plan cost of living adjustments and fringe benefit limitations. It helps employers ensure that they are withholding the correct amount of taxes from the pay of employees who receive various benefits. The chart will be updated annually when new amounts are announced by the Internal Revenue Service, which is usually by the end of October.