Employee Fringe Benefits, written by William E. Elwood, Esq., and Cynthia A. Moore, Esq., both of Dickinson Wright PLLC, discusses the substantive rules pertaining to various fringe benefits provided by an employer to employees, including statutory fringe benefits under §132.
This Portfolio covers in detail the various categories of fringe benefits under §132: working condition fringes, no-additional cost services, qualified employee discounts, de minimis fringe benefits, qualified transportation fringes, qualified moving expense reimbursements, and qualified retirement planning services.
It also considers the taxation of §127 educational assistance programs and §129 dependent care assistance programs, as well as supplemental unemployment benefit trusts under §501(c)(17).
Employee Fringe Benefits discusses the organizational and operational requirements for plans or programs providing these benefits, including the rules on withholding and employment taxes, and the “separate line of business” rules of §414(r).
Additional topics found in the Portfolio include Phantom Stock or Unit Stock Plans, Flexible Spending Accounts, calculation of gross profit percentage, Earned Income Limits, safe harbors, the Cents-Per-Mile Method, requirements under §127, and more.
Employee Fringe Benefits allows you to benefit from:
This Portfolio is part of the U.S. Income Portfolios Library, a comprehensive series that includes more than 200 Portfolios, which covers every federal tax topic with expert, in-depth analysis, and offer commentary on a wide range of federal taxation topics, including Compensation Planning, Deductions and Credits, Partnerships and Corporations, Special Pass-Through Entities, Corporate Reorganizations, Real Estate, Procedure and Administration, and more.
Detailed Analysis
I. Introduction and Overview
A. Types of Fringe Benefits
1. Current Provision of Property, Services or Cash
2. Future Cash Payments or Property Rights
a. Qualified Plans
b. Nonstatutory Deferred Compensation Arrangements
c. Statutory Cash or Deferred Compensation Arrangements
d. Stock or Equity Option Plans
e. Restricted Stock or Equity Plans
f. Phantom Stock or Unit Stock Plans
g. Stock or Equity Appreciation Rights
3. Benefits Provided Through Insurance
B. Tax Consequences of Fringe Benefits
1. Objectives
a. Current Benefits
b. Deferred Benefits
c. Insurance Benefits
2. Income Tax Consequences to the Employee
a. Inclusion in Income - General Rule and Exclusions
b. Time of Inclusion
(1) Current Inclusion Rule
(2) Exceptions Permitting Deferred Inclusion
(a) Unsecured Promise to Pay
(b) Income Recognition Statutorily Deferred
(c) Property Subject to Substantial Risk of Forfeiture
3. Income Tax Consequences for the Employer
a. Amount Deductible
b. Time of Deduction
(1) Current Deduction Rule
(2) Exceptions and Special Rules
(b) Property Subject to Substantial Risk of Forfeiture
(c) Special Rules
C. Tax Policy and Fringe Benefits
II. Statutory Rules for Incidental Benefits
A. Background
1. Attempts to Establish Uniform Rules
a. First Discussion Draft Regulations
b. Initial Legislative Response
c. Second Discussion Draft Regulations and Administrative Activities
2. The Tax Reform Act of 1984
3. Effect of Pre-1984 Act Authorities
B. Excluded Incidental Fringe Benefits - Section 132
1. Overview
a. General Rule of Inclusion
b. Statutory Exclusions
c. Regulations and Regulatory Authority
2. General Rules for Excludible Fringe Benefits
a. Working Condition Fringes
(1) Working Conditions Covered
(2) Requirements for Exclusion
(3) Permissible Recipients and Discrimination
(4) Special Rules and Specific Benefits
(a) Employer-Provided Transportation
(i) Company Car
(ii) Company Aircraft
(b) Office Decor and Administrative Support
(c) Employer-Provided Home Computers
(d) Professional Memberships, Dues and Publications
(e) Educational Assistance
(f) Security Arrangements
(i) In General
(ii) Transportation Security
(A) Substantiation of Need for Secure Transportation
(B) Amount of Transportation Security Exclusion
(C) Dependent Transportation Security
(g) Product Testing Programs
(h) Travel and Entertainment Reimbursements
(i) Outplacement Services
(j) Country, Social and Entertainment Club Dues and Memberships
(k) Spouse and Dependent Travel
(l) Miscellaneous Practices
(5) Excluded Benefits
(a) Flexible Spending Accounts
(b) Physical Examination Programs
(6) Accounting for Cash Reimbursements
b. No-Additional-Cost Services
(1) Services Covered
(a) Travel Passes and Privileges
(b) Reciprocal Agreements
(c) Telephone Services
c. Qualified Employee Discounts
(1) Discounts Covered
(a) Services that Qualify for Discount
(b) Method of Providing Discount
(c) Amount of Employee Discount
(d) Calculation of Gross Profit Percentage
(e) Excess Discount
(f) Leased Section of Department Store
d. De Minimis Fringe Benefits
(1) Benefits Covered
(a) Use of Office Equipment and Support Staff
(b) Meal Allowances and Taxi Fares
(c) Commuting
(d) Transit Passes
(e) Office Social Functions
(f) Gifts and Awards
(g) Theater or Sports Tickets
(h) Employee Welfare Benefits
(i) First Aid
(ii) Dependent Life Insurance
(iii) Other Welfare Benefits
(iv) Miscellaneous Benefits
e. Qualified Transportation Fringes
(1) Transportation Fringes Covered
(2) Exclusion Ceiling
(3) General Rules for Exclusion
(a) Bona Fide Reimbursement Arrangement
(b) Special Rule for Transit Passes
(c) Compensation Reduction Agreements.
(4) Permissible Recipients and Discrimination
(5) Special Rules and Specific Benefits
(a) Commuting in an Employer-Provided Commuter Highway Vehicle
(b) Transit Passes
(c) Qualified Parking
(d) Qualified Bicycle Commuting
f. Qualified Moving Expense Reimbursements
g. Qualified Retirement Planning Services
3. Special Exclusions
a. Cafeterias and Dining Rooms
(1) Requirements for Exclusion
(2) Income Inclusion for Nonqualifying Facilities
(a) Individual Meal Subsidy Method
(b) Allocation of Total Meal Subsidy
(3) Special Rules for Convenience of the Employer
b. Athletic Facilities
c. Demonstration Automobiles
4. Operating Rules and Definitions
a. Permissible Recipients
(1) Special Definition of Recipient
(2) Special Definition of Employee
(a) Current and Former Employees
(b) Spouses, Dependent Children and Parents
(c) Partners and LLC Members
(d) Independent Contractors
(e) Directors
(f) Self-Employed Recipients
(g) Volunteers
b. Expanded Definition of Employer
c. Line of Business Limitations
5. Nondiscrimination Rules
a. Background
b. Determination of Discrimination - Operating Rules and Definitions
(1) Coverage Test
(2) Classification Test
(3) “Substantially-the-Same-Terms†Test
(4) Definition of Highly Compensated Employee
c. Effect of Discrimination
d. Specific Benefits Covered
(1) No-Additional-Cost Services
(2) Qualified Discounts
(3) Dining Rooms and Cafeterias
(4) Other Benefits
e. Benefits Excluded from Nondiscrimination Rules
(1) Working Conditions
(2) De Minimis Fringe Benefits
(3) Qualified Transportation Fringes
(4) Qualified Moving Expense Reimbursements
(5) Demonstration Automobiles
(6) Gyms and Recreational Facilities
(7) Qualified Retirement Planning Services
C. Valuation of Incidental Benefits
1. Background
2. General Valuation Approaches
a. Retail or Charter Cost
b. Allocated Employer Cost
c. Incremental Employer Cost
d. Value to Employee
3. Special Valuation Rules Applicable to Employer- Provided Transportation
a. Employer-Provided Automobiles
(1) Overview of Valuation Rules
(2) Special Valuation Rules
(a) Consequences of Use of Special Rules
(b) Lease Valuation Rule
(c) Cents-per-Mile Method
(d) Commuting Valuation Rules
(e) Fleet Valuation Rule
(3) Employer Election of Use of Special Valuation Rules and Recordkeeping Requirements
b. Aircraft Flights
(1) Overview of Valuation Guidelines
(2) Employer-Provided Aircraft
(3) Commercial Flights
(4) Employer Election of Use of Special Valuation Rules and Recordkeeping Requirements
(5) Frequent Flyer Program Awards
III. Other Statutory Fringe Benefit Exemptions
A. Educational Assistance Programs - § 127
1. Background and Purpose
2. Benefits Provided
a. In General
b. Permissible Benefits
c. Limitation on Amount Excludible
3. Requirements Under § 127
a. Written Plan
b. Participation and Discrimination
(1) Persons Eligible to Be Covered
(2) Participation Requirements
(3) Discrimination as to Benefits
(4) Limitation of Benefits
c. Other Benefits as an Alternative
d. Notice to Employees
4. Optional Provisions of Program
a. When the Education May Be Undertaken
b. Approval
c. Successful Completion of Course
d. Double Payment of Benefits
e. Condition Subsequent/Length-of-Service Requirement
f. Job Relationship Requirements
g. Education Provider Requirements
h. Term of Plan
i. Substantiation
5. Procedural Requirements
6. Relationship with Prior Law
7. Effective Dates
B. Dependent Care Assistance Programs - § 129
a. Permissible Benefits
b. Limitation on Amount Excludible
(1) $5,000 Limit
(2) Earned Income Limit
(3) Identification of Care Provider
c. Comparison of § 21 Credit and § 129 Exclusion
3. Requirements Under § 129
b. Manner of Offering Plan
c. Participation and Discrimination
(1) Eligibility Test
(2) Discrimination as to Benefits
(3) Average Benefits Test
(4) Concentration Test
d. Statement of Expenses
e. Notice to Employees
4. Procedural Requirements
C. Employee Achievement Awards
D. Benefits Discussed in Other Portfolios
IV. Taxable Benefits
A. Benefits Subject to Current Tax
1. Vacations and Holidays
2. Tuition Payment and Tuition Reduction Plans
3. Financial Counseling
4. Interest-Free or Low Interest Loans
5. Gifts and Awards
6. Unrelated Employer Facility Benefits
7. Commuting
8. Excess Moving Expense Reimbursements
9. Housing Assistance Benefits
B. Benefits Subject to Deferred Tax
1. Retirement and Similar Benefits
2. Supplemental Unemployment Benefit Plans
a. Background and Purpose
b. Supplemental Unemployment Benefit Trusts
c. Requirements of § 501(c)(17)
(1) General Requirements
(2) Requirement of Plan
(3) Permissible Benefits
(4) Persons Eligible
(5) Discrimination as to Eligibility and Benefits
(6) Investments of Trustee
(7) Procedural Requirements
(a) Application
(b) Maintenance
(8) Multiemployer Plans
d. Deductions by Employers
e. Tax Consequences to Employees
V. Miscellaneous Considerations
A. Withholding and Employment Taxes
1. Section 132 Incidental Fringe Benefits
b. General Rules for Collection
(1) Deemed Payment Date Election
(2) Estimation Option
(3) Special Accounting Rule
c. Special Rules
(1) Discount Purchases
(2) Investment Property and Real Estate
2. Other Statutory Fringe Benefits
a. Educational Assistance Programs
b. Dependent Care Assistance Programs
c. Employee Achievement Awards
d. Supplemental Unemployment Benefit Plans
3. Penalties for Failure to Withhold
a. Failure to Pay Assessed Deficiency - § 6651(a)(3)
b. Accuracy-Related Penalty - § 6662
c. Failure to Make Deposit of Taxes - § 6656
d. Failure to Collect and Pay Over Tax - § 6672
e. Failure to Furnish Correct Payee Statements - § 6722
B. Welfare Benefit Fund Limitations
1. Definition of Welfare Benefit Fund
a. Definition of “Fundâ€
b. Definition of “Welfare Benefitsâ€
2. Deduction Limits
b. Qualified Direct Cost
3. Qualified Asset Account
a. General Limits
b. Special Limits for SUB Plans
4. Collectively Bargained Plans
5. Aggregation of Welfare Benefit Funds
6. Carryover of Excess Contributions
7. Unrelated Business Income
C. ERISA Requirements
1. Application to Welfare Benefit Plans
2. Reporting and Disclosure
3. Fiduciary Standards
4. Plan Requirements
5. Preemption of State Law
VI. “Separate Line of Business†for Employee Benefit Plan Purposes
A. Introduction
1. Conceptual Approach
2. Gateway Testing
3. Definitions
a. Testing Year
b. Testing Day
c. First Testing Day
d. Section 401(a)(26) Testing Day
B. Separate Line of Business
1. Defining a Line of Business
2. Defining a Separate Line of Business
a. Separate Organizational Unit
b. Separate Financial Accountability
c. Separate Workforce
d. Separate Management
e. Optional Rule for Vertically Integrated Lines of Business
C. Threshold Requirements
1. Fifty-Employee Requirement
2. Notice Requirement
3. Administrative Scrutiny
a. Statutory Safe Harbor
b. Administrative Safe Harbors
(1) Industry Category Safe Harbor
(2) Merger and Acquisition Safe Harbor
(3) Reportable Business Segments Safe Harbor
(4) Average Benefits Safe Harbor
(5) Minimum or Maximum Benefits Safe Harbor
c. Individual Determinations
D. Separate Operating Units
E. Determination of Employees of a Qualified Separate Line of Business
1. Substantial-Service Employees
2. Allocation of Residual Shared Employees
a. Dominant Line of Business Method
b. Pro-Rata Method
c. Highly Compensated Employee Percentage Ratio Method
d. Small Group Method
3. Optional Rule for Assigning Employees Who Change Status
4. Assignment Procedures
F. Separate Application of Statutory Requirements
1. Section 129(d)(8)
2. Section 410(b)
a. General
b. Employer-Wide Application
c. Qualified Separate Line of Business Application
d. Special Rule for Employer-Wide Plans
e. Definition of “Planâ€
f. Coordination with § 401(a)(4)
g. Failure to Comply
3. Section 401(a)(26)
G. Application of Separate Line of Business Requirements and Special Rules
1. Testing Year Basis
2. Averaging Rules
3. Mergers and Acquisitions
4. Affiliated Service Groups
5. Governmental and Tax-Exempt Employers
Working Papers
Table of Worksheets
Worksheet 1 [Reserved]
Worksheet 2 Sample Educational Assistance Plan
Worksheet 3 Summary Plan Description for Educational Assistance Plan
Worksheet 4 Sample Dependent Care Assistance Plan
Worksheet 5 Summary Plan Description for Dependent Care Assistance Plan
Worksheet 6 Sample Employee Statement to Employer Regarding Employee's Use of Employer's Automobile
Worksheet 7 Sample Written Policy on Commuting in Employer-Provided Vehicles
Worksheet 8 Sample Policy on Commuting Provided by Employer Due to Unsafe Conditions
Worksheet 9 Model Qualified Written Policies on Demonstration Automobile Use
Worksheet 10 Sample Policy on Product Testing Program
Bibliography
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