Bookkeeping – Other Employer Provided Benefits (Lesson 93)
Other employer-provided benefits are composed of three groupings of benefits:
- Other (Life Insurance, Auto & Education)
This lesson explains each group and illustrates how the accountant records the benefit for bookkeeping and payroll tax purposes. This lesson is a continuation of the benefits series including health, retirement; HSA, HRA and FSA’s; and cafeteria plans.
Most of the other employer-provided benefits are less expensive than the traditional direct benefit plans explained to date. This is because most other benefits are indirect in nature and often a minor cost to the employer or of insignificant value to the employee. Let’s start out with welfare benefits.
Welfare benefits are non-deferred compensation advantages to employees. They are triggered by an unusual or infrequent event. Notice the difference with the benefits described to date. Those benefits are provided for normal and expected events. Welfare benefits are for the truly unexpected incidents. They consist of accidents, disability, unemployment and severance compensation. The following sub-sections elaborate in more detail about each of these welfare benefits.
Accident plans are insurance policies purchased by employers (very common in high risk labor companies such as roofing, construction, tank services, steel erection, tower maintenance etc.). The policies provide coverage in case of injury. A perfect example is professional football teams that by coverage for their players. The insurance covers direct injury of the employee and their family members. The premiums paid by the employer are not included in the employee’s compensation. However, if an accident occurs, the employee is directly reimbursed for any out-of-pocket costs associated with the medical costs of the accident. Any payments made in excess of actual costs are considered income to the employee. This includes payments for personal injuries or an extended illness. These payments have to be attributable to the employer’s payments into the plan and not the employee’s share (some plans allow employees to contribute to the accident plan).
This additional income is tricky as it is only taxable for income tax purposes and NOT FICA purposes. This is the first time to date in these lessons whereby an employee can actually have taxable wages greater than Social Security or Medicare wages.
Disability exists when an employee is physically unable to perform their duties. Often it is related to an injury. If this injury occurs on the job, workers compensation and Social Security’s disability benefits kick in to assist the employee. Social Security’s disability exists to cover permanent injury. But most injuries are short-term and rehabilitation takes time. This is where private insurance is beneficial. Employers can provide disability insurance at a lower cost than at the individual level as they are capable of exercising group discounts.
The accounting for these plans are similar to accident plans whereby any employer payments are not income to the employee. The benefits derived may be taxable to the employee depending on how much the employee pays into the plan and whether the payments were pre or post tax.
Employers are mandated by federal (FUTA) and state law (SUTA) to pay into unemployment programs. When an employee is laid off, the state’s unemployment commission or department of taxation supplements the employee’s compensation.
The income is taxable to the employee and payments made by employers are deductible for business tax purposes.
Severance compensation is pay provided to employees after termination and is in addition to earned vacation or sabbatical pay. Most employers that provide this benefit do it as a function of closing a division or as a gesture of goodwill. The compensation may be in addition to other benefits paid at termination whereby it is called a severance package. There is no insurance policy that covers this and this is rarely provided at the small business level. It is simply too expensive.
Severance pay is treated similarly to regular compensation. The value is included in the employee’s wages when paid and is taxable for both FICA and income tax purposes.
Other Benefits Group
Other benefits consist of life insurance, employer-provided vehicle (covered in Lesson 94), dependent care and education assistance. In general, these benefits are not taxable income to the employee up to a certain dollar value for the respective benefits. The following sub-sections go into more detail about each.
Under Code Section 79 the cost of life insurance up to $50,000 of face value is excludable as income to the employee when paid by the employer. Any premium paid in excess of the $50,000 basis is included in the employee’s compensation and is taxable for employment and income taxes as traditional wages.
The type of policy is a group-term life insurance policy and is generally inexpensive on average. A 50 employee group will pay less than $400 per month fo this coverage (covers the entire group). This policy is used across the board for all employees. However, in small business some employees are key to the company’s success, therefore employers arrange for an additional type of life insurance know as split-dollar.
Split-dollar life insurance is a form of life insurance that shares (splits) the benefit between the owner of the policy and the beneficiary, i.e. the employer and employee. In general, any premiums paid in excess of the $50,000 threshold is allocated as income to the employee based on the split sharing. For the benefits to be tax-free, both the employer and employee must pa for the policy with after tax dollars. The employee’s allocated share of the premium is deductible by the employer as compensation. In turn, the employee pays his/her share with after-tax dollars.
In order to receive the life insurance benefit as tax-free, the employer’s share of the premium is paid with after-tax dollars too. Notice that the employer’s premium for group term life insurance is deductible for tax purposes. Why?
With group term life insurance, the employer receives no benefit upon the death of an employee. Whereas with split-dollar life insurance, the employer does receive a benefit from the proceeds of the policy.
Dependent Care Assistance
An employer may pay up to $5,000 per year under a written plan to provide dependent care for employees. The employer’s payment is deductible as a benefit expense for labor and the value provided is excluded from the employee’s compensation. The employee must report the benefit and is not allowed to receive the tax credit on Form 1040.
The benefit care assistance must comply with the same rules as an employee would use under a personal program.
Educational Assistance Programs
An employer may pay up to $5,250 for tuition, fees, and books per employee per year under Code Section 127. The employee does not include this benefit in his/her’s gross wages. The tuition paid may be for undergraduate or graduate studies. This benefit is limited to the employees and is not allowed for employee spouses or dependents.
Code Section 132 identifies several benefits that may be excluded from the employee’s compensation. In general, these benefits are of de minimus value which means the administrative costs of monitoring, calculating, and allocation to each employee are unreasonable in business. A perfect example is the use of the copier or fax machine.
Fringe benefits include:
- Employee Discounts
- On-Premise Athletic Facilities (rarely found in small business)
- Employer Provided Cell Phone
- Qualified Transportation
- Moving Expenses
In general, the cost of benefits to the employer are relatively insignificant and the value to the employee is so low that it would not change the employee’s decision for continued employment.
The following is a short description of some the respective fringe benefits and any pertinent accounting attributes.
Employee Discounts – To qualify for this discount the discount value cannot exceed the average gross profit percentage for the item purchased by the employee. Discounts are most common in the retail sector and are referred to as the employee’s price.
Meals – Meals are excluded from the gross wages of the employee if the meals are provided by the employer on the premises of the employer for the employer’s convenience. The meals are a condition of employment and are necessary to meet the business objective. Examples include meals at fire stations, correctional facilities, emergency centers, nursing homes and child-care facilities. Some larger institutions may provide subsidized dining facilities. Examples include schools, hospitals and remotely located operations. For these business owned eating facilities, as long as the employees pay the direct operational costs. No value is assignable to the diners.
Cell Phones – When the employer needs to contact the employee for work related emergencies or for client access, the employer is allowed to provide a cell phone to the respective employee. Refer to notice 2011-72 discussing this particular subject matter. The communication must be regular and often necessary during off-duty hours.
Moving Expenses – An employee may exclude from gross income the costs to move furniture and personal items from an old residence to a new residence if these costs are reimbursed by the employer and are incurred as a cost of employment. The employer must require the move as a condition of employment and the move complies with the distance tests.
Qualified Transportation – Under Code Section 132(f) the following employer-provided transportation benefits are excluded from an employee’s gross wages:
- Transit Passes
- Parking Lot/Garage Reimbursements
- Van Pooling
Cash offered in lieu of the expense is included in gross wages and the total maximum amount allowed per month is $250 for transportation benefits combined.
Summary – Employer Provided Benefits
Internal Revenue Code Section 132 covers other benefits to employees. Most of these benefits are of an indirect value to the employee. These other benefits comprise three different groups consisting of:
- Welfare Benefits – Non-deferred compensation such as accident, disability plans, unemployment and severance pay (severance pay is included in an employee’s compensation when paid);
- Other Benefits – Include life insurance (group term and split-dollar), dependent care and education assistance; and
- Fringe – Benefits of de minimus value such as employee discounts, on-site meals, cell phones and qualified transportation expenses.
Often the nature and location of the respective business determines which benefits make the most sense to offer. If the employer exercises these other benefits wisely it can increase moral and make the employee think twice about leaving the employer. Most other benefits are excluded from the gross wages of the employee. ACT ON KNOWLEDGE.
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