Deferred Compensation and Employee Benefits (Lesson 5) Flashcards
(160 cards)
1
Q
What are the general characteristics of a deferred compensation arrangements
A
- Do not have tax advantages of qualified plans
- usually deferral of income to the executives
- Employer does not receive an income tax deduction until the key employee receives the payment
- funds are subject to a substantial risk of forfeiture
2
Q
Why are deferred compensation arrangements most often used
A
- to increase executive wage replacement ratio
- to defer the executive compensation or
- in lieu of qualified plans
3
Q
What is a golden handshake plan
A
- severance package often designed to encourage early retirement
4
Q
What is a golden parachute plan
A
- substantial payments made to executives being terminated due to changes in corporate ownership
5
Q
What is a golden handcuff plan
A
- designed to keep the employee with the company
6
Q
How does deferred compensation help with wage replacement ratio
A
- deferred compensation helps executives replace wages that are limited by the contribution limits of other plans
7
Q
What is the employee tax benefit for a deferred compensation plan
A
- the executive generally defers the compensation to a time when he expects to be in a lower marginal tax bracket
8
Q
What is the employer tax benefit for a deferred compensation plan
A
- the IRC places a $1 million limit on public companies deduction for compensation payable to any one of the top 5 executives of a publicly traded company
- if the executive defers any income over the $1 million limit to a year in which the executive earns less than the limit the employer would be able to deduct the total compensation over the period of deferral and subsequent payments
9
Q
What is constructive receipt that is used for deferred compensation
A
- an income tax concept that establishes when income is includable by a taxpayer and subject to tax
10
Q
When does a substantial risk of forfeiture exists
A
- when rights in property that are transferred are conditioned directly or indirectly, upon the future performance of substantial services by any person, or the occurrence of a condition related to a purpose of the transfer and the possibility of forfeiture is substantial if the condition is not satisfied
11
Q
What is the economic benefit doctrine
A
- provides that an employee will be taxed on funds or property set aside for the employee if the funds or property are unrestricted and nonforfeitable even if the employee was not given a choice to receive the income currently
12
Q
How is property transferred in connection with performance of services taxed under section 83
A
- when an employer transfers property to an employee in connection with the performance of services the employee will be taxed on the difference between the FMV of the property and the amount paid for the property
13
Q
When is deferred compensation subject to payroll tax
A
- when it is earned
14
Q
When is a employer entitled to receive an income tax deduction for contributions to a deferred compensation plan
A
- when the employee is required to include the payments as taxable income
15
Q
What is a non qualified deferred compensation plan (NQDC)
A
- is a contractual arrangement between an employer and an executive whereby the employer promises to pay the executive a predetermined amount of money sometime in the future
16
Q
What is the advantage of a deferred compensation plan to a employer
A
- cash outflows are often deferred until the future
- employer will save on payroll taxes except for the 1.45% Medicare match
- employer can discriminate and provide these benefits exclusively to a select group of key employees
17
Q
What are secular trusts
A
- irrevocable trusts designed to hold funds and assets for the purpose of paying benefits under a non qualified deferred compensation arrangement
- assets are often subject to some other form of risk or they become taxable to the employee
18
Q
What is a Rabbi Trust
A
- assets in a rabbi trust are for the sole purpose of providing benefits to employees and may not be accessed by the employer but they may be seized and used for the purposes of paying general creditors in the event of the liquidation of the company
- treated as unfunded due to a presence of a substantial risk of forfeiture
19
Q
Are the below plans funded with assets
Unfunded Promise to Pay
Rabbi Trust
Secular Trust
A
Unfunded Promise to Pay: No
Rabbi Trust: Yes
Secular Trust: Yes
20
Q
Are the below plans considered funded under ERISA
Unfunded Promise to Pay
Rabbi Trust
Secular Trust
A
Unfunded Promise to Pay: No
Rabbi Trust: No
Secular Trust: Yes
21
Q
Are the below plans subject to risk of forfeiture without employer financial instability
Unfunded Promise to Pay
Rabbi Trust
Secular Trust
A
Unfunded Promise to Pay: Yes
Rabbi Trust: No
Secular Trust: No
22
Q
For the below plans when is there taxable income to the executive
Unfunded Promise to Pay
Rabbi Trust
Secular Trust
A
Unfunded Promise to Pay: When actually or constructively received
Rabbi Trust: When actually or contributively received
Secular Trust: Immediately upon funding by employer or vesting
23
Q
For the below plans when is the payment deductible to the employer
Unfunded Promise to Pay
Rabbi Trust
Secular Trust
A
Unfunded Promise to Pay: Deferred until payment is made to executive
Rabbi Trust: deferred until payment is made to executive
Secular Trust: Immediately as funded and constructively received
24
Q
Do the below plans accomplish the objective of deferral of income
Unfunded Promise to Pay
Rabbi Trust
Secular Trust
A
Unfunded Promise to Pay: Yes
Rabbi Trust: Yes
Secular Trust: If vesting is required
25
Are the below plans subject to risk of forfeiture if employer is insolvent
Unfunded Promise to Pay
Rabbi Trust
Secular Trust
Unfunded Promise to Pay: Yes claim is below general creditors
Rabbi Trust: Yes claim is below general creditors
Secular Trust: no
26
What is a phantom stock plan
is a non qualified deferred compensation arrangement where the employer grants fictional shares of stock to a key employee that is initially valued at the time of the grant
27
What is a salary reduction plan for a NQDC plan
- allows employees to elect to reduce their current salary and defer it until future years generally until retirement or termination
28
What is a salary continuation plan for a NQDC plan
- typically provide benefits after retirement on an ongoing basis or for a predetermined period of time
29
What is a supplemental executive retirement plan (SERP) for a NQDC plan
- non qualified compensation arrangements designed to provide additional benefits to an executive during retirement
30
What is a 401k wrap plan
- are a form of salary reduction plan that enables executives who are subject to salary deferral limitations due to the nondiscrimination rules to contribute higher amounts than otherwise permitted under a 401k plan
31
What is a stock option
- stock option gives the employee a right to buy stock at a specified price for a specified period of time
- option agreement must be in writing and the option holder has no obligation to exercise the option
- terms of the option agreement must be stated in the agreement
32
What are the two standard types of stock options
- Incentive stock options (ISOs)
- Non Qualified Stock Option (NQSO)
33
What is a ISO
- is a right given to an employee to purchase an employers common stock at a stated exercise price
- if IRC 422 are met when the ISO is granted the employee will not recognize any taxable income at the date of grant
34
What happens when an ISO is granted to an employee
- If IRC 422 are met when the ISO is granted the employee will not recognize any taxable income at the date of grant
35
What happens when a ISO is exercised
- the employee will also not be subject to ordinary income tax on the difference between the FMV of the stock and the exercise price (bargain element)
- The bargain element though is a positive adjustment for the ALT Min tax
36
What happens when an employee sells the stock after the exercise of the ISO
- difference between the sales price of the stock and the original exercise price is considered LT capital gain (or holding period) and there is a negative adjustment for the alternatives minimum tax calculation
37
How long do you have to hold a ISO for it to be a qualified sale
- requires waiting 2 years from the date stock was granted and 1 year from the date the stock was exercised
38
Who can be granted an ISO
- only be granted to an employee of the corporation issuing the ISOs
39
Who must must approve the ISO plan
- must be approved by the stockholders of the issuing corproation
40
How long after the ISO plan date must ISOs be granted
- within 10 years of plan date
41
What is the limit of time when an ISO can be exercised
- 10 year period
- 5 years if 10%+ owners
42
Can an ISO be transferred
- Only at death
43
How long must an employee be a employee of the corporation from the date of grant and exercise of the ISO
- Executive must be an employee of the corporation continuously form the date of the grant until at least 3 months prior to the exercise
44
What is the requirement of the price of the ISO grants at the time the option is first exercisable
- First at the date of the ISO grant the exercise price must be greater than or equal to the FMV of the stock
- the aggregated FMV of the ISO grants at the time the option is first exercisable must be less than or equal to $100,000 based on the grant price per year per executive.
- Any excess grant over the $100,000 is treated as a NQSO
45
Does an employer receive a tax deduction related to the grant, exercise, or sale of an ISO if it is a qualified sale
No
46
When does a disqualifying disposition of an ISO occur and what is the tax treatment
- If stock acquired through ISO is disposed of before either two years form the date of the grant or one year from the date of exercise
- Any gain on the sale of the stock attributable to the difference between the exercise price and the FMV at the date of exercise will be considered ordinary income (Not subject to payroll tax or fed w/h)
- Any gain in excess of the difference between the exercise price and the FMV at the date of exercise will be ST or LT capital gain considering the holding period
47
What is a Cashless exercise of a ISO
- at the time of a cashless exercise a third party lender lends the executive the cash needed to exercise the option and the lender is immediately repaid with the proceeds of the almost simultaneous sale of the stock
- triggers at least a partial disqualifying disposition since the holding period requirements will not be met
48
What is a Non qualified stock option (NQSO)
- is an option that does not meet the requirement of an incentive stock option or it is explicitly identified as a non qualified stock option
49
Do NQSO qualify for favorable capital gains treatment
- do not receive favorable capital gains treatment but it is not subject to the same holding period requirements of ISOs
50
What is the tax effect of a NQSO at the grant date
- will not create a taxable effect assuming that there is no readily ascertainable value for the NQSO
- if the option does have an ascertainable value at the date of grant the executive will have W-2 income equal to the value and the employer will have an income tax deduction
51
What is the tax effect when a NQSO is exercised
- The executive will recognize W-2 income for the appreciation of the FMV of the stock over the exercise price
- Income and payroll tax withholding will apply and employer will have an income tax deduction for the same amount
- basis of the NQSO will be the stock at exercise price plus the bargain element included in the executives W-2 will be the basis of the stock
52
What happens when a stock is sold that is acquired through NQSO
- the executives gain or loss will be considered capital gain or loss and will receive short or long term capital gain treatment according to the elapse of time between the date of the sale and the exercise date
53
Can a NQSO be gifted and what are the tax consequences
- Can be gifted provided the NQSO plan permits transfer of ownership
- No immediate income tax consequence on the transfer
- Upon exercise of the NQSO by the donee the employee will have W-2 income for the difference between the exercise price and the FMV on the date of exercise
- Donee's basis after the exercise will be equal to the FMV on the date of exercise
- If employee pays the exercise price it is an additional gift to the donee
54
(NQSO/ISO)
What happens at the grant date for each
NQSO: No taxable income to holder if issued at the current or greater share price
ISO: No taxable income to holder if issued at the current or greater share price
55
(NQSO/ISO)
What happens at the exercise date
NQSO:
- Executive gives options and exercise price to company
- company issues stock to executive to replace option
ISO:
- Executive gives options and exercise price to company
- company issues stock to executive to replace option
56
(NQSO/ISO)
What is the taxation event that happens at exercise of each type of option
NQSO:
- At exercise executive recognizes W-2 income to extent of difference between current stock price and exercise price
ISO:
- at exercise executive does not recognize any regular taxable income but will have an AMT adjustment for the appreciation over the exercise price
57
(NQSO/ISO)
What is the adjusted basis of the stock for each type of option
NQSO:
- Executive adjusted basis in the stock in equal to the FMV of the stock (Exercise price in cash plus the recognition of W-2 income)
ISO:
- Executive adjusted basis in stock is equal to the exercise price
58
(NQSO/ISO)
What happens when a stock is sold from each type of option
NQSO:
- capital gain or loss treatment
ISO:
- capital gain or loss treatment for a qualified disposition
59
What are Stock Appreciation Rights (SARs)
- are rights that grant to the holder cash in an amount equal to the excess of the FMV of the stock over the exercise price
- a way to achieve a cashless exercise
60
How are payments received for the stock appreciation rights treated
- includable in gross income in the year the rights are exercised
61
When are stock appreciation rights granted
- generally SARs are granted with NQSOs or ISOs and may be used to provide cash to the executive which is necessary to exercise the NQSO or ISO
- usually the number of NQSOs or ISOs is reduced by any exercised SARs
62
What is a restricted stock plan
- plan pays executives with shares of the employers stock
- executive does not pay any amount towards the allocation of the stock and is restricted by the employer from selling or transferring the stock
- restriction most often gives the employer the ability to repurchase the stock during a set period of years or prohibits the executive from selling the stock during a set number of years or until a defined occurrence of event
63
What happens when restricted stock is received
- executive will generally not recognize any taxable income as the restrictions generally create a substantial risk of forfeiture
- no deductible expense for the employer
64
What happens when the substantial risk of forfeiture is eliminated
- the executive recognizes W-2 income equal to the value of the stock at that date and the employer will have a tax deductible expense for an equal amount
- Amount recognized by the executive becomes the executives adjusted basis in the stock for purposes of any subsequent gain or loss calculation
65
What is a section 83(b) election
- if property is transferred in connection with the performance of services the person performing such services may elect to include in gross income under section 83b the excess (if any) of the FMV of the property at the time of transfer over the amount (if any) paid for such property as compensation for services
66
How is the gain or loss computed when a Section 83b election is made
- basis is the amount paid for the property increased by the amount included in gross income under section 83b
- Holding period is based upon the date the value was included in gross
67
How is property for which a Section 83b election is in effect is forfeited while substantially nonvested
- such forfeiture shall be treated as a sale or exchange upon which there is realized a loss equal to the excess (if any) of the amount paid (if any) for such property over the amount realized (if any) upon such forfeiture
68
Under a Employee Stock Purchase Plan what is the maximum a stock can be discounted
- 85% of a date determined stock price or an average stock price
69
Under a Employee Stock Purchase Plan what is the dollar limit that can be purchased by the employee
- employee is statutorily limited to purchasing $25,000 of employer stock per year as determined based on the FMV at the date of grant or the employer stock through the ESPP
70
What is a qualifying disposition under a ESPP
- employee must hold the stock for two years from the date of grant and one year from the date of exercise
- Employees gain on the sale of the stock will be ordinary income to the extent the gain is attributable to the discount at the date of purchase
- any gain in excess of ordinary income portion will be LT capital gain
71
What happens if a disqualifying disposition under a ESPP occurs
- if employee does not meet the holding requirements the sale is a disqualifying disposition
- primary difference as compared to a qualifying disposition is that the gain attributable to the discount will be W-2 income rather than ordinary income
72
What happens if the employee sells the stock purchased through a ESPP at a price less than the exercise price (for a loss)
- employee will have a ST or LT capital loss as determined based upon the holding period beginning at the date of exercise and the difference between the exercise price and the sales price
73
What is a fringe benefit
- is a form of compensation where a benefit other than customary taxable wages is provided by the employer to the employee for the performance of services
74
How are fringe benefits taxed
- all fringe benefits provided to an employee are taxable as wages unless a specific provision of the IRC excludes the benefit from taxation or unless the employee pays fair value for the benefit
75
Is the value of the fringe benefit provided to an employee deductible by the employer
- is deductible as compensation expense by the employer unless the fringe benefit is excludable from the employees taxable income
76
Under the 2017 TCJA change a deduction for which employee fringe benefits are non deductible
- activity generally considered to be entertainment, amusement, or recreation
- membership dues to any club organized for business, pleasure, recreation, or other social purpose or
- facility or portion thereof used in connection with nay of the above items
- no deduction for any qualified transportation fringe -
77
What are some characteristics of meals that meet the requirements for a fringe benefit
- employee may exclude from gross income the value of all meals provided in kind (not as cash reimbursement) to him, his spouse, or any other dependents as long as the meals meet both the following requirements
- meals are furnished for convenience of the employer or
- meals are furnished on the employers business premises
- meals provided for convenience of the employer are now limited to a 40% deduction for year after 2017
78
What are the two specific examples that the IRS lists as meals that are not considered provided for the convenience of the employer
- any meal provided to promote the morale or goodwill of the employee or to attract prospective employees does not qualify for the exclusion
- if the employer charges the employee for the meal the meal will not be regarded as furnished for the convenience of the employer if the employee has a choice of accepting the meal an d paying for it or of not paying it and providing his own meals
79
What are the three requirements for lodging to be excluded from an employees gross income
- lodging is furnished on the employers business premises
- lodging in furnished for the convenience of the employer and
- employee is required to accept the lodging as a condition of employment
80
What happens if the three requirements for lodging to be excluded from an employees gross income is not met
- Employee must include the value of the lodging in gross income irrespective of whether the value exceeds or is less than the amount charged
81
What must an athletic facility furnished by the employer need to be considered on premises and qualify to be excluded from employees gross income
- operated by the employer
- located on premises owned or leased by the employer and
- substantially all of the use of the facility is by employees of the employer, their spouses, or their dependent children
82
In order for a education assistance program to be considered a qualified plan it must
- be a separately written document which provides employees with educational assistance
- program does not need to fund or apply to the IRS for a determination of whether the plan is qualified
83
What is the gross income exclusion limit amount for educational assistance programs
- $5,250
84
What does educational assistance include
- expenses included by an employee for education including books or
- employers provision of education to an employee
- education loan repayments made by the employer to employee (or lender)
85
What does educational assistance not include
- payment for tools or supplies, other than textbooks that the employee may retain
- employers payment for meals, lodging, or transportation or
- employers payment for education involving sports, games, or hobbies unless the education involves the employers business or is a required part of a degree program
86
What services are included form exclusion of income under a dependent care assistance program
- services must be provided for one of the following qualifying persons
- dependent children under 13 years of age
- dependent children who are physically or mentally incapable of caring for themselves or
- an employees spouse if the spouse is physically or mentally incapable of caring for themselves
87
How much can an employee exclude from gross income under a dependent care assistance program
- employee may exclude up to the lesser of:
- $5,000 annually in benefits received through a dependent care assistance program from their gross income or
- the earned income of the employee or their spouse
88
What are no additional cost services fringe benefit
- exclusion applies to any service provided by an employer to an employee that does not cause the employer to incur any substantial additional cost or lose revenue
- must be offered to customers in the ordinary course of business in which the employee performs substantial services
89
What will qualify as an exclusion from income for qualified employee discounts
- exclusion for an employee discount is limited to the lesser of:
- 20% of the price at which the service is offered to non employee customers or
- for MERCHANDISE or other property, the employers gross profit percentage multiplied by the price the employer chares non employee customers for the property
90
What are working condition fringe benefits that can be excluded from employees gross income
- defined as property or services provided to an employee that enables the employee to perform their work and if paid for by the employee would be deductible as a trade or business expense
- Not subject to nondiscrimination rules
- EX: Company car
91
What is considered a qualified vehicle for non personal use
- clearly marked police and fire vehicles
- unmarked vehicles utilized by law enforcement
- ambulance or hearse
- vehicle designed to carry cargo with a loaded gross weight over 14,000 pounds
- delivery trucks with seating for the driver only
- passenger bus with the capacity of at least 20 passengers
- school bus and
- tractors or other farm type vehicles
92
What is a De Minimis Fringe benefit
- is any property or service provided by an employer to an employee that is so small in value that it makes accounting for it unreasonable or administratively impracticable
93
Under the TCJA how are reimbursed qualified moving expenses treated
- They are taxable to the employee
- suspended deduction for years 2018 - 2025
94
How is a qualified transportation and parking benefit treated
- prior to 2018 regulations provided for an exclusion of the value of qualified transportation benefits from an employees gross income of a specific amount (if over this amount the remaining amount would be included in employees income)
- After 2018 (TCJA) disallows the employer a deduction for expenses associated with providing any qualified transportation fringe to employees except for ensuring safety of an employee (Employee does not have to treat the benefit as income though unless the employer wants the deduction)
95
What is the adoption assistance program
- an employee may exclude from gross income amounts paid for, or expenses incurred, by the employer for qualified adoption expenses concerning the adoption of a child by an employee if these amounts are furnished according to a written adoption assistance program
96
How must can an employee exclude form an employees compensation under an adoption assistance program and what is the AGI phaseout range
- $14,400
- income phaseout starting at $216,660 to $256,660
97
How old must the child be in order to qualify for the adoption assistance program
- under the age of 18
98
What are the limits for an employee to exclude from gross income the value of awards
- $400 for all non qualified plan awards when added to the employers cost for all other employee achievement awards made to such employee during the taxable year that are not qualified plan awards and
- $1,600 for all qualified plan awards when added to the employers cost for all other employee achievement awards made to such employee during the taxable year
99
What is a qualified plan award under the awards and prizes fringe benefit
- an employee achievement award bestowed as part of an established written plan of the taxpayer that does not discriminate in favor of highly compensated employees
- if the average cost of all employee achievement awards provided by the employer during the year exceeds $400 then such employee achievement award shall not be treated as a qualified plan award for any tax year
- Must also be tangible personal property
100
What is a qualified tuition reduction plan
- is defined in the IRC as the amount of any reduction in tuition provided to an employee of an educational organization for education below the graduate level of:
- current employees
- former employees who retired or left on disability
- widow of a person who died while employed
- widow of former employees who retired or left on disability or
- dependent children or spouse of any of the above
101
What value is used for fringe benefits
- general valuation rule or FMV
102
What is the standard mileage rate
$0.56 per mile
103
What is the commuting rule
- value of this fringe benefit is determined by multiplying each one way commute from home to work or from work to home by $1.50
104
When is the commuting rule allowed
- employer provides the employee the vehicle for use in the employers business and the employer requires the employee to commuting in the vehicle for bona fide noncompensatory business reasons
- A written policy is established and implemented whereby the employer does not permit the employee to use a vehicle for personal use other than for commuting or minimal personal use
- other than de minimis personal use and commuting the employee does not use the vehicle for personal use
- if the vehicle used is an automobile the employee who uses the automobile for commuting must not be a control employee
105
What is the lease value rule
- used to value an employer provided automobile
- the value is determined by using the automobiles annual lease value
106
What is the unsafe conditions commuting rule
- determines the value of commuting transportation provided by an employer to a qualified employee solely because of unsafe conditions as $1.50 for a one way commute
- requires that a qualified employee be provided with the subject commuting transportation
107
When does the unsafe conditions commuting rule apply
- employee must ordinarily walk to work or use public transportation
- employer must have a written policy against transportation for personal purposes
- employee does not use the transportation for personal reasons beyond commuting due to unsafe conditions
108
How are payments of medical insurance premiums taxed
- Excluded from employees income
- deductible for income taxes by the employer
109
Which employers are required to have COBRA Provisions
- employer that maintains a group health plan
- employs 20 or more people on more than 50% of the calendar days in a year
110
How long do COBRA benefits have to be provided to a worker, spouse and dependent during a normal termination
18 Months
111
How long do COBRA benefits have to be provided to a worker, spouse and dependent who goes from full time to part time
18 Months
112
How long do COBRA benefits have to be provided to a spouse and dependent after the death of an employee
36 months
113
How long do COBRA benefits have to be provided to a spouse and dependent when the employee reached Medicare age
36 Months
114
How long do COBRA benefits have to be provided to spouse and dependent after divorce
36 Months
115
How long do COBRA benefits have to be provided to worker, spouse, and dependent if the plan terminates and another plan is offered
36 Months
116
How long do COBRA benefits have to be provided to dependent who reaches an age that they no longer eligible under the plan
36 Months
117
How long do COBRA benefits have to be provided to a worker, spouse, and dependent when the employee or dependent is disabled
29 months
118
During the statutory COBRA period what can the premiums not exceed
102% of the cost of the plan
119
How are amounts paid by the employer for group term life insurance taxed
- employer can deduct the amounts paid and the employee can exclude a portion if not all of the value from their income
120
When is life insurance considered group life insurance
- unless the employer provides it to at least 10 full time employees at some time during the year
121
If the employer does not meet the 10 employee rule it can meet the following three requirements for it to be considered group life insurance
- employer provides coverage under the plan to all of its full time employees who provide evidence of insurability
- coverage provided under the plan must be based on either a uniform percentage of pay or a set amount of coverage depending upon age, years of service, compensation, or position
- required evidence of insurability must be limited to a medical questionnaire that does not require a physician
122
What amount of death benefit can be provided tax free to an emplyoee
- up to $50,000
123
For a group term life insurance policy to be considered nondiscriminatory the plan must cover either
- 70% or more of all eligible employees or
- 85% of the non key employees
124
What is a cafeteria plan
- is a written plan under which the employee may choose to receive cash as compensation or tax free fringe benefits
125
What benefits are allowed in a cafeteria plan
- accident and health benefits (but no medical savings accounts or LT care insurance)
- adoption assistance
- dependent care assistance
- group term life insurance coverage
126
What is a flexible spending account
- is a cafeteria plan that is funded by employee deferrals rather than employer contributions
- Use it or lose it account for current year
- can be used during the grace period which is up to the 15th day of the third calendar month
127
What is the FSA contribution limit
$2,750
128
How are contributions to an FSA taxed
- subject to income taxes or payroll taxes
129
What is an archer MSA account
- HSA accounts replaced MSA accounts
- employer and employee can contribute to the plan
130
What is an HSA account
- similar to MSAs but less restrictive
- HSAs can be established by anyone with a high deductible health insurance plan
- allow a higher contribution amount and
- reduce the penalty for non medical distributions
131
What does an individuals insurance plan deductible have to be in order to qualify for a HSA account
- $1,400 for single coverage and out of pocket expenses cannot exceed $7,000
- $2,800 for family coverage and out of pocket expenses cannot exceed $14,000
132
Who can contribute to an HSA account and what is the contribution limit
- employee and employer
- individual $3,600
- Families $7,200
- Ages 55 - 64 can make an additional catch up of $1,000
133
If a distribution from an HSA account is not used for a qualified medical expense what is the consequence
- entire distribution is taxable as ordinary income
- if before age 65 also subject to a 20% penalty
134
Who can establish a MSA account
- Employers with fewer than 50 employees
- self employed individuals
- had to be established be 2006
135
What is the maximum contribution for a MSA account
- single 65% of deductible
- family 75% of deductible
- no catch up contribution available
136
What is a voluntary employees beneficiary association (VEBA)
- is a welfare benefit plan into which employers deposit funds that will be used to provide specified employee benefits in the future
- a trust of corporation set up by an employer to hold funds used to pay benefits under an employer benefit plan
137
Are contributions to a VEBA plan deductible by the employer
- yes
138
What benefits can a VEBA plan provide
- life insurance before and after retirement
- fitness and accident benefits
- severance benefits paid through a severance pay plan
- unemployment and job training benefits
- disaster benefits
- legal service payments for credits
139
How are premiums for group long term care insurance taxed
- premium payments for qualified group long term care insurance are tax deductible if paid by the employer and tax free to the employee
140
What must a qualified long term care insurance plan do to be a qualified long term care insurance plan
- only provide long term care insurance coverage
- not duplicate benefits paid by Medicare
- plan must be guaranteed renewable and
- only pay benefits when the employee or beneficiary of the plan is certified by a licensed health care practitioner as chronically ill
141
Can an employee pay long term care premiums with pre tax salary deferrals
No
142
Can long term care premiums be paid within a cafeteria plan or FSA
No
143
What happens if an employee pays long term care premiums with after tax dollars
- the employee may deduct the premiums as an itemized medical expense
144
How are business disability plan premiums and payouts taxed
- premiums are deductible as a business expense
- payouts from the plan are taxable income to the entity
145
What is key employee life insurance
- not an employee benefit
- company purchases life insurance on a key employee making nondeductible premium payments and receiving a tax free death benefit
- If employee is more than a 50% owner the proceeds of the policy will be included in the employees estate
- taxable for corporation AMT tax but not regular tax
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When is key employee life insurance included in an employees estate
- if they are more than a 50% owner the proceeds of the policy will be included in the employees gross estate
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What is split dollar life insurance
- is an arrangement where an employee and employer generally share the premium costs and cash value or death benefit of the policy covering the life of the employee
- purpose of the split dollar benefit is to reimburse the employers share of the premium cost of the policy
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What is the standard split dollar plan and what are the advantages/disadvantages
- the employer pays the portion of the premium that equals the increase in the cash value
Advantages
- simple in design and easy to explain and the employers investment is fully secured
Disadvantages
- high premium payments required by the employee early on
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What is a level premium split dollar plan and what are the advantages/disadvantages
- the employees share of the premium cost is level over a specified period of time
Advantages
- does not require high premiums payments by the employee
Disadvantages
- if terminated early the employers reimbursement, if limited to cash value, is not fully recognized
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What is a employer pay all split dollar plan and what are the advantages/disadvantages
- the employer pays the entire premium
Advantage
- the employee does not have to come out of pocket yet receives life insurance protection
Disadvantage
- the employee must recognize taxable income based on the table 2001 rates
- if terminated early the employers reimbursement, if limited to cash value, is not fully recognized
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What is a offset split dollar plan and what are the advantages/disadvantages
- the employee pays the Table 2001 cost, if applicable, and the employer pays the remainder
- effectively zeros out the employees income tax cost for the plan
Advantages
- the employees cost is minimal and this offers the potential that the employer provides a special bonus in the amount owed by the employee
- the premiums paid are not tax deductible but the bonus amount is
Disadvantages
- if terminated early the employers reimbursement, if limited to cash value, is not fully recognized
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What are the two means of policy ownership
- Endorsement method
- Collateral assignment
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What is the endorsement method of policy ownership
- the employer owns the policy and is primarily responsible for making the premium payments
- employee may elect a beneficiary but the employer is paid a portion of the death benefit equal to the death benefit split that is in the agreement
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What are the advantages of the endorsement method of policy ownership
- plan is easy and simple to create and administer, the employer exercises greater control, and it avoids being considered a loan for purposes of laws and regulations
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What is the collateral assignment method of policy ownership
- the employee owns the policy and is primarily responsible for making the premium payments
- Employer makes interest free loans to the employee in the amount of the premium the employer is responsible for
- employee may elect a beneficiary but the employer is paid a portion of death proceeds
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What are the advantages of the collateral assignment method
- the plan provides more protection for the employee and employees beneficiary and can implemented easier with existing life insurance owned by the employee
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Can the employer deducted premiums paid if the endorsement or collateral assignment method are used
- Employer cannot deduct premiums paid under either method and the death proceeds are tax free
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How are endorsement method policies taxed
- the employee recognizes income in the amount of the pure death benefit under Table 2001 less any amount contributed to the plan by the employee
- employee is taxed on any cash value that the employee gains access to during the year
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How are equity type collateral assignment plans taxed
- the premium amounts loaned to the employee are deemed demand loans if there is no stated interest rate
- additional compensation income to the employee in the amount of the assumed interest payable based on the AFR
- employer gets a deduction for the assumed income paid and the employee must report the income on their return
- the employee then pays the employer the assumed interest, providing interest income to the employer and an interest deduction
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What is business overhead expense insurance
- provides coverage for business expenses, not including the owners wages, in the event the business owner becomes totally disabled
- 1 to 2 years is typical length of policy
- policy premiums are deductible business expenses and the income is generally taxable
