Lesson 5 of Retirement Benefits: Deferred Compensation and Employee Benefits Flashcards

Question

**Funding Arrangements and Types of Nonqualified Deferred Compensation Plans** - Types and Applications of NQDC Plans

Answer 1

There are **several types** of non-qualified deferred compensation plans that can be established to **benefit key executives**. 1) **Salary reduction plans** allow employees to elect to **reduce their current salary and defer it until future years,** generally until retirement or termination. 2) **Salary continuation plans** typically provide **benefits after retirement on an ongoing basis or for a predetermined period of time.** Supplemental Executive Retirement Plans (generally referred to as SERPs) are non-qualified deferred compensation arrangements designed to provide **additional benefits to an executive during retirement.** - These plans are also referred to **as top-hat plans** because they are designed to benefit a select group of top management or key employees. - **Excess-benetit plans** are a type of SERP that is designed solely to **provide benefits in excess of the benefits available** in qualified plans. - - **Salary-reduction plans are common with professional athletes.** A large signing bonus a part thereof, is frenuently transferred to an escrow agent to deter the receipt of taxable income until such time as the athlete is **beyond his/her peak earning period**, thereby helping to assure the athletes future financial security.

Answer 2

401(k) wrap plans 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 401(k) plan.**

Answer 3

Answer: A. Statement 2 is incorrect because payroll taxes are due on deferred compensation at the time the compensation is **earned and deferred**, not at the date of distribution.

Answer 4

An employee stock option **gives employee a right to buy stock at a specified price for a specified period of time.** Stock options are usually **granted to select employees for the purchase of stock of the employer or a subsidiary**. - The option agreement must be in **writing**, and - the option **holder has no obligation to exercise the option.** - The **terms of the option agreement must be stated** (e.g., 10 years) in the agreement

Answer 5

Generally, the **option price** (exercise price) is **equal to the FMV at the grant date** (the date or issuance). If the option does not have a readily ascertainable FMV at the grant date, there is **no taxable income to the option holder** as of the grant date. If values were available and the **value was ascertainable**, it would be **taxable income to the recipient.** An **option is a form of deferred compensation** if the price of the stock increases. If the stock price declines, the option **holder will simply allow the option to lapse.** It is important to note that **options granted at FMV** are NOT subject to the rules under IRC Section 409A. **Options issued at a discount from FMV**, however, are **subject to IRC Section 409A and its harsh tax results.**

Answer 6

Generally, **stock options vest over time**, thus continuing to provide an **incentive to the executive who is receiving the option to remain with the employer** and to be productive.

Answer 7

There are **two standard types** of employer stock options: - Incentive Stock Options (ISOs) and - Non-Qualified Stock Options (NQSOs).

Answer 8

An incentive stock option (ISO) is a **right given** to an **employee to purchase an employer's common stock** at a stated exercise price. If the requirements of IRC Section 422 are met when the incentive stock option is granted (provided the **exercise price is equal to the FMV of the stock**), the **employee will not recognize any taxable income** at the date of grant. Further, at the date of exercise, 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). HOWEVER, this difference (the bargain element) is a **positive adjustment for the Alternative Minimum Tax (AMT) calculation.** When the employee **sells the stock** subsequent to the exercise, the **difference between the sales price of the stock and the original exercise price is considered long term capital gain** (assuming the holding period requirements are met), and there is a **negative adjustment for the alternative minimum tax** calculation. To obtain this preferred tax treatment the requirements below must be met: - In addition, a strict dual holding period must be met. - A qualified sale requires **waiting until 2 years from the date stock was granted and 1 year from the date the stock was exercised.** - Sales prior to either holding period being met are disqualified dispositions and terminate most of the tax benefits. - it effectively triggers similar treatment as a NQSO.

Answer 9

Must know the holding periods and retirements.

Answer 10

At the date of exercise, Phil has no W-2 income, or ordinary income, but does have an AMT adjustment of $320,000 ($420,000 - $100,000) which may cause Phil to pay AMT. For regular tax, he has an adjustable basis of $100,000. When he subsequently sells the stock for $600,000, he has a long-term capital gain of $500,000 subject to a capital gains rate of 15% and a negative AMT adjustment equal to $320,000.

Answer 11

Answer: B Statements 3 and 4 are correct. Since Tori held the underlying security 2 years from grant and one year from exercise before its sale, Tori will receive long-term capital gain treatment for the appreciation, and her employer will not have a deductible expense related to the ISO.

Answer 12

If stock acquired after exercising an ISO is disposed of before either **two years from the date of the grant** or **one year from the date of exercise**, the sale is known as a disqualifying disposition and some of the favorable tax treatment is lost (see above). - For such a sale, any gain on the sale of the stock attributable to the difference between the exercise price and the fair market value at the date of exercise will be **considered ordinary income**, but it will **not be subject to payroll tax** or federal income tax withholding. Any gain in excess of the difference between the **exercise price and the FMV at the date of exercise will be short- or long-term capital gain** considering the executive's holding period.

Answer 13

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.** A cashless exercise of incentive stock options automatically triggers **at least a partial disqualifying disposition** since the holding period requirements will not be met.

Answer 14

Jo, an executive, has 10,000 ISOs with a $8 exercise price. When the value of the stock increases to $32, the stock has a total value of $320,000. If Jo exercised today, she would need $80,000 to exercise the option (ignoring any potential AMT consequence) Like many individu- als, Jo does not have the $80,000 cash available to exercise the option. Therefore, Jo makes a cashless exercise of the option and receives $240,000 (the proceeds from the sale of the stock less the exercise price of $80,000 In reality, the proceeds Jo actually receives will be reduced for withholding taxes. Since the sale of the stock did not meet the holding period requirements of an ISO, $240,000 will be subjected to ordinary income tax

Answer 15

Answer A When an ISO is exercised, the appreciation in excess of the exercise price is an AMT adjust- ment. In this case, Ralph would have an AMT adjustment equal to $30,000 (15,000 x $2 appre- ciation). **Regular Income Tax:** Recognition = $0 Exercise Price =$3 Adjusted Basis: $3 **AMT:** Recognition: $8 Exercise Price: $3 Adjusted Basis: $5 AMT = (5-3) x 15,000

Answer 16

An NQSO is an option that does **not meet the requirements of an incentive stock option** or is it explictly identified as non-qualified. Basically it is a **bonus program** - additional compensation, nothing more. As such, the exercise of NQSOs do **not receive favorable capital gains treatment**, but also are n**ot subject to the holding period** associated with ISOs. From a risk perspective, the **executive takes no risk in an NQSO.** If the stock price falls below the exercise price l've exccutive simply does not exercise. If the stock appreciates, the executive may stock,

Answer 17

The **grant of an NQSO will not create a taxable effect** assuming that there is no readily ascertainable value for the NQSO. If, however, the option does have a **readily ascertainable value** at the date of grant, the **income will otherwise have W-2 income equal to the value** and the employer will have a income tax deduction.

Answer 18

At the exercise date of the NQSO, the **executive will deliver to the employer both the option and the exercise price** per share. The executive will **recognize W-2 income for the appreciation of the fair market value of the stock over the exercise price** (often referred to as the **bargain element**), income and payroll tax withholding will apply, and the employer will have an income tax deduction for the same amount. The amount **paid for the stock at exercise plus the bargain element** included in the executive's W-2 will form the basis for the stock.

Answer 19

Stock acquired through the exercise of an NQSO does **not have a specified holding period requirement.** When the stock is sold, the executive's gain or loss will be **considered capital gain or loss and will receive short or long-term capital gain treatment** according to the elapsed time between the date of the sale and the exercise date.

Answer 20

On January 2, 20x0 (the grant date), Scott, an executive with Amco Corporation, is issued one non-qualified stock option from Amco with an exercise price of $10 (the current market price). On January 3, 20x1, Scott exercises his option when the Amco stock price is $35. Scott brings the option and $10 to Amco. Amco issues the stock and Scott recognizes $25 in W-2 income from Amco. Scott's new basis in the stock is $35. He later sells the stock, on March 4, 20x1 for $50, which creates a short-term capital gain of $15. If instead, Scott had sold the stock on or after January 4, 20x2, the gain would be long term. **Regular Income Tax:** Recognition = $25 Exercise Price =$10 Adjusted Basis: $35 **AMT:** Recognition: $45 Exercise Price: $10 Adjusted Basis: $35 **Regular Income Tax:** Sales Price = $50 Adjusted Basis =$35 Gain(ST): $15 **AMT:** Sales price: $50 Adjusted Basis: $35 Amount Gain: $15

Answer 21

Statements 2 and 3 are correct. Bailey would not have any taxable income at the date of grant provided the exercise price is equal to the fair market value of the stock, **Bailey's employer Would receive a tax deduction equal to the amount of W-2 income.** (Option 4) Bailey would be required to recognize $8 of W-2 income-at the date of exercise. Bailey's long-term capital gain is $5, calculated as the sales price of $35 less the exercise price of $30.

Answer 22

Answer: D At the exercise date of an NOSO, the individual will have to buy the stock at the exercise price and will have W-2 income for the appreciation of the stock value in excess of the exercise price. In this case, Meredith will have $45 ($145-$100) of W-2 income. There is no other gain or loss at exercise.

Answer 23

Lifetime transfers of **unexercised ISOs** by the employee are **not permitted.** - The requirement to obtain long-term capital gain treatment for the stock received upon exercise is that the stock must be **transferred only after the holding period requirement.** An NQSO can be gifted** provided the NQSO plan permits transfer of ownership.** There are no immediate income tax consequences 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 fair market value** on the date of exercise. The donee's basis after the exercise will be **equal to the fair market value** on the date of exercise (exercise price plus employee's tax recognition). - If the employee **also pays the exercise price**, it is an additional gift to the donee. Any gift of a NQSO that is neither vested nor exercisable is an incomplete gift.

Answer 24

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. The SAR is essentially a way to achieve a **"cashless exercise."** Payments received for the stock appreciation rights are **includable in gross income in the year the rights are exercised.** 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 NOSOs or ISOs is **reduced by any exercised SARs.**

Answer 25

The plan pays executives with shares of the employer's stock. The **executive does not pay any amount towards the allocation of the stock** and is **restricted by the employer from selling or transferring** the stock. The 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 or event** (e.g., the executive attains 10 years of service with the company). At receipt of the restricted stock, the **executive will generally not recognize any taxable income** (see Section 83(b) discussion below) as the **restrictions generally create a substantial risk of forfeiture**. In addition, the employer will **not have a deductible expense.** When this substantial risk of **forfeiture is eliminated,** however, 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.** The amount recognized by the executive becomes the **executive's adjusted basis in the stock **for purposes of any subsequent gain or loss calculation.

Answer 26

If property is transferred in **connection with the performance of services**, the person performing such services may **elect to include in gross income under IRC Section 83(b) the excess (if any) of the fair market value of the property at the time of transfer** over the amount (if any) paid for such property as compensation for services. In computing the gain or loss from the subsequent sale or exchange of such property, its **basis shall be the amount paid for the property increased** by the **amount included in gross income** under Section 83(b). Its holding period shall be determined based upon the date the value was included in gross income. If property for which a Section 83(b) 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**

Answer 27

Intended to benefit all or a large portion of an employer's employees (the plan cannot be discriminatory), an employee stock purchase plan (ESPP) **gives employees an incentive to buy employer stock** by allowing the employees to **purchase the stock at a discounted price and receive favorable tax treatment for any gains** if the stock meets certain holding period requirements. The employee is able to purchase the employer stock through the **ESPP for a price equal to no less than 85%** of a date-determined stock price or an average stock price. *Employee Dollar Limit:* - An employee is statutorily limited to purchasing **$25,000 of employer stock per year** as determined based on the fair market value at the date of grant of the employer stock through the ESPP. *Qualifying Disposition:* - If the employee holds the stock purchased through the ESPP for **two years from the date of grant and one year from the date of exercise, any subsequent sale is a qualifying** disposition of the stock. - The employee's 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 the ordinary income portion will be long-term capital gain. *Disqualifying Disposition:* - If an employee does not hold the stock purchased through the ESPP for at least two years from the date of grant and one year from the exercise date, any sale is a **disqualifying disposition**. - The 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. *Loss:* - If the employee sells the **stock purchased** through the ESP at a price **less** than the **exercise price**, the employee will have a **short-or long-term capital loss** as determined based upon the holding period beginning at the date of exercise and the difference between the exercise price and the sals

Answer 28

Scrubs Company has an ESPP and its stock traded on June 30, 20x0 for $30 and July 31, 20x0 for $25. Christina had elected to defer after-tax income to the ESP and purchased 400 shares of the stock at 85% of the lower of the two values. Christina purchased 400 shares of the Scrubs Company stock for $8,500 ($21.25 x400 shares). Six months later, Christina sold the 400 shares at $27 per share. Since Christina did not hold the stock for the required holding period, Christina will have W-2 income at the date of sale of $1,500 ($25.00 - $21.25) x400] and a short-term capital gain of $800 [($27.00 - $25.00) x 4001. ## Footnote Because you did not meet the holding requirements it is (21.25 x 400) and not 25 x 400.

Answer 29

## Footnote Because you met holding requirement it is (25/12) to get the how many shares.

Answer 30

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. Used effectively, it's a **way to increase employee total compensation without raising (or minimally raising) employee taxable income.** - Broadly, fringe benefits include paid vacation, sick leave, family leave, health insurance, life insurance, pension plans, profit sharing plans, the use of recreational facilities, personal use of employer's property, holidays, parking, prizes and awards, discounted products and services, and many others.

Answer 31

Under IRS Treasury Regulations, **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 fringe benefit.** The value of **a fringe benefit provided to an employee is deductible as compensation** expense **by the employer** unless the fringe benefit is excludable from the employee's taxable income. The 2017 TCJA eliminated the ability to deduct costs associated with many fringe benefits.

Answer 32

Nondiscrimination is an issue with some fringe benefits. Ensuring that the **employer does not discriminate against different classes of employees** is vital. If the fringe benefit is deemed **discriminatory, then the exclusion may be lost.** This will result in the** value of the fringe benefit being added to an employee's income.** As discussed below, some fringe benefits have nondiscrimination requirements while others do not.

Answer 33

**No deduction is allowed with respect to:** - An activity generally considered to be entertainment, amusement or recreation. - Membership dues to any club organized for business, pleasure, recreation, or other social purpose, or - A facility or portion there of used in connection with any of the above items. - Effective after 2017. No ER deduction for any **qualified transportation fringe**. Except as necessary for ensuring the safety of an employee, no deduction for expenses for commuting between an employee's residence and the placec of employment. Effective after 2017. Taxpayers (Business owner / Employer) **may still deduct 50% of food and beverage expenses associated with operating a trade or business (travel meals).** The law expands the 50% limitation to meals provided for the convenience of the employer. These rules are effective after 2017 through 2025. - Taxpayer Certainty and Disaster Tax Relief Act of 2020 created an exception to the 50% deduction limit for food and beverage provided by a restaurant. Such meals will be fully deductible when paid or incurred after December 21, 2020 and before January 1, 2023. Other rules for deduction meals remain unchanged (no lavish or extravagant meals, etc.)

Answer 34

1. Meals and Lodging Provided by the Employer to the Employee 2. Athletic Facilities Furnished by the Employer 3. Educational Assistance Programs 4. Dependent Care Assistance 5. "No-Additional-Cost Services" 6. Qualified Employee Discounts 7. Working Condition Fringe Benefits 8. "De Minimis" Fringe Benefits 9. Qualified Moving Expense Reimbursement 10. Qualified Transportation and Parking 11. Adoption Assitance Programs 12. Awards and Prizes 13. Qualified Tuition Reduction Plans

Answer 35

In general, an employee **may exclude from gross income the value of all meals provided in-kind (not as cash reimbursement) to him, his spouse, or any of his dependents as long as the meals** meet both of the following conditions: - The **meals are furnished for the convenience of the employer**, and - The **meals are furnished on the employer's business premises**. Meals **for the convenience of the employer are now limited to a 50% deduction** for years after 2017 through 2025 based on TCJA 2017. (See Taxpayer Certainty and Disaster Tax Relief Act above) **The Following CHART Gives examples of Meals deemed furnished for the convenience of the employer.**

Answer 36

Exception! - The IRS also provides specific examples as to what is **not considered "for the convenience of the employer."**

Answer 37

**The IRC provides an exclusion from an employee's gross income for the value of lodging furnished by an employer to an employee if ALL three of the following qualifications are met:** - The lodging is furnished on the employer's business premises; - The lodging is furnished for the convenience of the employer; and - The employee is required to accept the lodging as a condition of employment. **Includable Lodging - Exception!** - If the lodging is not furnished on the business premises of the employer, or the lodging is not furnished for the convenience of the employer, or the employee is not required to accept the lodging as a condition of the employment, then the employee must include the value of the lodging in gross income irrespective of whether the value exceeds or is less than the amount charged.

Answer 38

The value of any **"on premises athletic facility"** provided by an employer to an employee **is not included in the employee's gross income.** To be considered an "on premises athletic facility," it MUST meet the requirements listed below and **may include a gym or other athletic facility including a tennis court, pool, or golf course.** - 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.

Answer 39

Jake works at XYZ Advertising in a high-rise building in downtown Topeka, Kansas. Adjacent to the main office, XYZ rents out a gym from the building management. Under these circum stances, as long as the general public does not use the gym, the XYZ employees may exclude the value of the use of the on-premises gym from their gross income. However, if the high-rise building was a resort for residential use, then the value of the use of the athletic facility would need to be included in each employee's gross income.

Answer 40

The value of an **educational assistance program** provided by an employer for the benefit of an employee is **excluded from the employee's gross income** subject to certain limitations and requirements. To be considered qualified, the plan must be **a separately written document** which **provides employees with educational assistance.** The program need** not be funded, nor must the employer apply to the IRS for a determination of whether the plan is qualified**. The gross income exclusion for educational assistance is **limited to the value of $5,250.** "Educational assistance" includes: - Expenses incurred by an employee for education including books, or - the employer's provision of education to an employee. - Education loan repayments made by the employer to employee (or lender). - **CARES Act 2019 allows employee exclusion from income subject to the $5,250 limit**. Taxpayer Certainty and Disaster Relief Act of 2020 **extended the loan repayment** exclusion made before January 1, 2026.

Answer 41

- the employer's payment for tools or supplies, **other** than textbooks, that the employee may retain; - the employer's payment for meals, lodging, or transportation; or - the employer's payment for education involving sports, games, or hobbies, **unless** the education involves the employer's business or is a required part of a degree program. Nondiscrimination requirements apply - The IRC prohibits discrimination in the provision of the educational assistance program. If the program discriminates in favor of officers, shareholders, self-employed, or highly compensated employees, then the exclusion from gross income is lost.

Answer 42

The IRC allows an employee to **exclude the value of dependent care assistance** (as defined below) provided by an employer from the employee's gross income. (This is not an FSA item!) Dependent care assistance **applies to household and dependent care services** paid for or provided by the employer to an employee under a dependent care assistance program. **The services must be provided under the following conditions:** - dependent children under 13 years of age; - dependent children who are physically or mentally incapable of caring for themselves; or - an employee's spouse if the spouse is physically or mentally incapable of caring for herself. The services must also **allow an employee to work.** An employee may exclude up to the lesser of: - $5,000 annually ($2,500 for married couples filing separate returns) in benefits received through a dependent care assistance program from her gross income, OR - the earned income of the employee or her spouse. The plan **must provide beneficiaries with advance notice of the program** to permit them to make informed decisions about dependent care. **Non-discrimination requirements apply** to the dependent care assistance exclusion!!

Answer 43

The exclusion for "no-additional-cost services" **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.** The service provided must be offered to customers in the **ordinary course of business** in which the employee performs substantial services. Examples: of no-additional-cost services include **providing free airline, bus, or train tickets, and hotel accommodations or telephone services either tree or at reduced prices** to employees working in those lines of business. **Caution**: Foregone revenue or substantial costs associated with providing these services could deem them taxable. For example, whether the no-additional-cost exclusion would be available to for an airline employee may depend on whether they fly "stand-by' or reserve. **If the airline had to forego revenue to provide the fringe benefit it will not be excludable.** Nondiscrimination requirements apply! - Employers may not **exclude the value of the services to highly compensated employees** if the value of the no-additional-cost service is not available, on the same terms, to most emplovees

Answer 44

The value of "qualified employee discounts" on **property or services** offered to an **employer's customers in the ordinary course of the employer's business** may be **excluded from an employee's income** (subject to certain limits). The **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 employer's **gross profit percentage multiplied by the price the employer** charges non-employee customers for the property. Nondiscrimination rules apply to the exclusion for qualified employee discounts.

Answer 45

Eric's Parts Depot sells radiators for $100 to its customers. The radiator cost Eric's $80. If Eric's allows its employees to purchase the radiator for $90, the employee can exclude the $10 discount from his gross income. If, however, Eric's sold the radiator to the employee at $75 then the employee would be required to include $5 in his gross income. The maximum excludable discount in this situation is $20 (20% x$100). Gross Profit Percentage: ($100 - $80) = $20 / $100 = 20% 20% x $100 = $20

Answer 46

The value of "**working condition fringe benefits"** provided by an employer are **excluded from an employee's gross income.** Working condition fringes are defined **as any property or service provided to an employee that enables the employee to perform his work and, if paid for by the employee, would be deductible as a trade or business expense**. It may even include cash reimbursement for such items purchased by the employee. Not subject to nondiscrimination rules! **Example**: A common working condition fringe benefit is the provision of a company car. If the employee utilizes the car for both personal and business purposes, the portion used for business is considered the value of the working condition fringe benefit, whereas the personal use value of the car will be included in the employee's gross income.

Answer 47

If an employee is provided a vehicle that is deemed to be a qualified **non-personal use vehicle, the value of the provision will be excluded from his gross income.** Qualified non-personal use vehicles may include: - Clearly marked police and fire vehicles; - Unmarked vehicles utilized by law enforcement individuals if the use is officially authorized; - An ambulance or hearse; - Any vehicle designed to carry cargo with a loaded gross weight over 14,000 pounds; - Delivery trucks with seating for the driver only or the driver with a folding jump seat; - A passenger bus with the capacity of at least 20 passengers; - School buses; and - Tractors or other farm-type vehicles.

Answer 48

The term "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. **Examples of some de minimis fringe benefits:** - Occasional typing of personal letters by a secretary hired by an employer; - Occasional personal use of an employer's copying machine, providing that the employer exercises sufficient control and imposes significant restrictions on the personal use of the machine so that at least 85% of the use of the machine is for business purposes; - Traditional birthday or holiday gifts or property (not cash) with a low FMV; - Coffee, donuts, or soft drinks; - Local telephone calls; and - Flowers, fruit, or books, or similar property provided to employees under special circumstances (i.e., on account of illness, outstanding performance or family crisis). **Exceptions - Items that do NOT qualify as "de minimis"** - Season tickets for sporting or theatrical events; - The commuting use of an employer-provided automobile more than one day a month; - Membership in a private country club or athletic facility; - Employer-provided group term life insurance on the life of the spouse or child of an employee; and - Use of employer-owned or leased facilities (such as an apartment, hunting lodge, boat, etc.) for a weekend, unless required for work **Benefits Exceeding Value and Frequency Limits - All or Nothing** - If a benefit is provided to an employee that is not deemed de minimis due to excess value or excess frequency, then NO amount is considered a de minimis fringe.

Answer 49

The 2017 TCJA **suspends the deduction for moving** for taxable years 2018 through 2025. However, the provision is retained for active duty members of the military that move pursuant to a military order and incident to a permanent change of station. Employers may continue to reimburse such moves but the reimbursement will be taxable income. **Qualifying Move:** - The move must be due to a relocation while on active duty. **Deductible Moving Expenses:* Deductible moving expenses are confined to reasonable expenses for the following: - Traveling and associated lodging DURING the move from the former home to the new home. Any portion or amount of **reimbursement for expenses that could have been deductible, will be excluded from income** for US Armed Forces members. Nondiscrimination rules do not apply. | ONLY FOR ARMED FORCES

Answer 50

**Prior to 2018**, the regulations provided for an **exclusion of the value of qualified transportation benefits** from an employee's gross income. This exclusion for transportation benefits was subject to limitations. If the value of a benefit **was more than the limit,** then **any excess amount above the limit,** l**ess any amount the employee paid,** was **included in the employees income**. The excess could **not qualify as a deminimis** benefit. The 2017 TCJA **disallows the ER a deduction for expenses associated with providing any qualified transportation fringe to employees** - except for ensuring safety of an employee. However, there is no **requirement to treat the benefit as taxable income to EE's** unless the ER wants the deduction. Effective after 2017.

Answer 51

Answer: A No deduction for expenses associated with providing any qualified transportation fringe to employees is permitted after 2017, Emily can exclude the $265 from income.

Answer 52

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.** An employer may establish a written adoption assistance program that will **pay expenses related to an adoption not exceeding $15,950** for 2023 to an employee. The amount paid is excluded from the employee's income, **but it is subject to an income phaseout starting at $239,230 of adjusted gross income (AGI) for 2023 through $279,230**. If the employee's AGI is greater than or equal to $279,230 for 2023, then the exclusion is eliminated. Must adopt a child under the age of 18 to receive the credit. Nondiscrimination requirements apply. As of the time of printing, the phaseouts have not been finalized. We will issue a supplement once the phaseouts are determined.

Answer 53

Certain prizes and awards given to employees by the employer may be excluded from the employee's gross income. **Limits on Value of Awards:** - An employee is allowed to exclude from gross income the value of any employee achievement awards insofar as the cost of the award **does not exceed the following limitations:** - **$400 for all non-qualified plan awards** when added to the employer's 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 employer's cost for all other employee achievement awards made to such employee during the taxable year (including employee achievement awards that are not qualified plan awards). **Qualified Plan Award** - A "qualified plan award" is defined **as 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. - However, there are limitations on this exclusion. 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 taxable year. The 2017 TCJA added a definition for tangible personal property, which shall not include: - cash, cash equivalents, gift cards, vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, or other similar items. Therefore, any award must now comply with the definition for tangible personal property. Effective after 2017.

Answer 54

An employee may exclude from gross income any **amount representing a qualified tuition reduction.** Qualified tuition reduction 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(er)s of a person who died while employed; - widow(er)s of former employees who retired or left on disability; or - dependent children or spouses of any of the above. Although this exclusion **normally does not apply to the graduate level**, exceptions for individuals who are **graduate students teaching or performing research activities** for an educational organization may be **eligible.** The educational organization must normally maintain a regular faculty and curriculum and have a regularly enrolled body of students in attendance at the place where its **educational activities are carried out in the normal course of business.** This educational organization can be elementary, secondary, a college, or university. Nondiscrimination rules apply.

Answer 55

Answer: D Peter must include $600 of the reimbursement in his gross income, as moving expenses are not excludible after 2017, except for active duty military.

Answer 56

1. General Valuation Rule 2. Cents-Per-Mile Rule 3. Commuting Rule (Specialized Issue!) 4. Lease Value Rule 5. Unsafe Conditions Commuting Rule (Specialized Issue)

Answer 57

Most fringe benefits are valued under the **general valuation rule.** - Basically, the **FMV should be the value assigned to a fringe benefit.**

Answer 58

Valuation under the cents-per-mile rule requires **multiplying the standard mileage rate by the total miles the employee drives** the vehicle for **PERSONAL PURPOSES. ** The standard mileage rate is **$0.655 per mile** for 2023

Answer 59

The 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.** This value applies to more than one employee irrespective of whether one or more employees ride in the vehicle during the commute. The commuting rule is allowed if all of the following requirements are satisfied: - The employer **provides the employee the vehicle for use in the employer's business** and the **employer requires the employee to commute 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.** Rather than using the definition of a control employee, an employer may choose to **define a control employee as a highly compensated employee**

Answer 60

According to the lease value rule, the **value of an employer-provided automobile** is determined by using the **automobile's annual lease value.** The annual lease value of an automobile is determined by **first ascertaining the automobile's FMV on the first day it is available to any employee for personal use.** Personal use of a leased luxury car, provided by your employer, **may increase the amount of income that will be included in your W-2** due to the lease value rule.

Answer 61

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. The unsafe conditions commuting rule requires that a "qualified employee" be **provided with the subject commuting transportation.** For the unsafe conditions **commuting rule to apply**, the **employee must ordinarily walk or use public transportation; the employer must have a written policy against transportation for personal purposes other than commuting because of unsafe conditions; and the employee does not use the transportation for personal reasons** beyond commuting due to unsafe conditions. Finally, whether other **"unsafe conditions" exist** is determined based on the **facts and circumstances of each individual situation.**

Answer 62

Introduction Medical Plans Group Term Life Insurance Cafeteria Plans Flexible Spending Accounts Tax Year 2020 and 2021 Changes to FSA Health Care Spending Arrangements Other Employee Benefits Employer/Employee Insurance Arrangements

Answer 63

The federal government, in the case of some fringe benefits and insurance plans, promotes employer insurance arrangements by allowing **the employer to pay the premiums for the employees and immediately deduct the cost for income tax purposes** **without requiring** the participant **employee to include** the premium cost in their **taxable income.** Any group insurance premium amounts paid by the employer are generally **deductible by the employer** or included in the **employee's gross income.**

Answer 64

There are a number of ways that an **employer can provide an employee with benefits for medical expenses** due to personal injury or sickness. Many employers use these types of **group health insurance plans** as a part of the overall compensation package provided to their employees. Included in these health insurance plans are both **private insurance plans and self-insurance plans.** Any payments made to these plans are **deductible for income taxes by the employer** and **excluded from the employee's gross income.**

Answer 65

The **premiums** paid by the employer for health insurance are not includable in the employee's taxable income but are a **deductible business expense for the employer under IRC Section 162**. **Group medical insurance includes:** - hospitalization coverage, - major medical, - indemnity coverage, - health maintenance organization, - preferred provider organizations, - point of service plans, and - dental and vision plans.

Answer 66

The employer can generally **exclude the value of accident or health benefits** provided to an employee **from the employee's gross income.** Premiums paid by the **employer for accident, health, and disability insurance policies are deductible by the employer** and **excluded from the employee's income.** When the **insurance benefits are paid, they are includable in the employee's income** with the exception of: - payments received for medical care of the employee, spouse, and dependents; - and payments for permanent loss or the loss of the use of a member or function of the body or permanent disfigurement of the employee, spouse, or dependent.

Answer 67

Under the Combined Omnibus Budget Reconciliation Act of 1986 (COBRA), an **employer that maintains a group health plan and employs 20 or more people onmmore than 50% of the calendar days in a year** is required to: - continue to provide coverage under the plan to covered employees and qualified beneficiaries following the occurrence of a statutorily defined qualifying event. This is depicted in the following exhibit.

Answer 68

The **employer may pay for the COBRA coverage either** - directly or - by reimbursing the employee, or - the employer may shift the burden of paying for the benefit to the beneficiaries. During the **statutory COBRA period, the premium cannot exceed 102% of the cost to the plan** for similarly situated individuals who have not incurred a qualifying event. If a qualified beneficiary **receives the 11-month disability extension of coverage, the premium for the additional 11 months may be increased to 150% of the plan's total cost of coverage**. **COBRA premiums may be increased** if the costs to the plan increase, but generally must be fixed in advance of each 12-month premium cycle

Answer 69

Amounts paid by the employer for group term life insurance also receive favorable tax treatment. The **employer can deduct the amounts paid for the insurance**, and the **employee can exclude a portion, if not all, of the value from his income.** To receive such favorable treatment, the** life insurance must provide a general death benefit to a group of employees**, and the **coverage must provide an amount of insurance to each emplovee based on a formula that prevents individual selection**. This formula must use factors such as the employee's age, years of service, pay, or position. Generally, **Iife insurance provided by the employer is not considered group term lilfe insurance** - unless the employer provides it to **at least 10 full-time employees** at some time during the year. If the employer does **not meet the general 10-employee rule**, the employer may still be eligible to recognize the benefits of the group term life insurance coverage if the **employers provision of the coverage meets the following three requirements:** - The employer provides coverage under the plan to all of its full-time employees who provide evidence of insurability. - The 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. - The required evidence of insurability must be limited to a medical questionnaire (completed by the employee) that does not require a physician. Group term life insurance **premiums paid by the employer on the first $50,000 of death benefit are deductible by the employer and are excludable from an employee's gross income.** - The cost, as determined under the Uniform Premium Table provided by the IRS, of any death **benefit coverage in excess of $50,000** is taxable to the employee.

Answer 70

The **employee can always receive the first $50,000 of death benefit coverage tax free**. Thus, if an employee's death benefit under the employer-provided term life insurance is $90,000, the employee will be taxed (as determined above) on $40,000 ($90,000 - $50,000) of the coverage. Nondiscrimination rules apply - To be considered nondiscriminatory, the plan must cover either: - 70% or more of all eligible employees, or - 85% of the non-key employees.

Answer 71

Disability insurance provides benefits in the form of **periodic payments to a person who is unable to work due to sickness or accidental injury.** The **cost of disability insurance varies depending on** occupation, age, and sex of insured, as well as the benefit term, coverage, and the length of the waiting period (elimination period) provided under the policy. - Disability insurance can be **provided under a group or individual plan and as either short-term** (up to two years) **or long-term** coverage (over two years). In any case. the premiums paid by the **employer are deductible by the employer and are not included in the employee's gross income.** HOWEVER, **when the employer pays the premium** and the value is excluded from the employee's gross income, any disability income **benefit received by the employee is taxable to the employee.** If the **employee pays the entire premium with after-tax income** or the **employer pays the premium** and the **employee includes the premium payment in income**, any benefits received will be considered tax exempt.

Answer 72

Answer: B Elisa can exclude the cost of up to $50,000 of group term life insurance coverage. In this case, the cost of $50,000 of coverage is $450 [50 ($50,000 ÷ $1,000) × 0.75 x12 months].

Answer 73

A cafeteria plan is a written plan under which the **employee may choose to receive cash** as compensation or tax-free fringe benefits. Provided the cafeteria plan meets the requirements defined below, the value of the fringe benefit, if **chosen by the employee, will be a deductible expense for the employer and will not be included in the employee's gross income.** The following **chart summarizes benefits that are allowed and benefits that are not allowed.** In the case where the **plan provides a benefit that is not allowed,** - the value of the **benefit will be included in the employee's gross income.** Discrimination in **favor of either highly compensated or providing more than 25% of the benefit to the key employees** - will result in the **value of the nontaxable benefits chosen by the key employees or highly compensated being included in their gross income.**

Answer 74

A flexible spending account (FSA) is **a cafeteria plan that is funded by employee deferrals** rather than employer contributions. Because of the consequences of** forfeiture of unused benefits,** these are often referred to as **"Use It or Lose It" accounts**. - However, after 2012, the IRS permits FSA funds to be used in the **"grace period,"** which must not extend beyond the **15th day of the third calendar month** after year-end. Since the ACA 2010, FSAs have an annual limit that is indexed. The limit for 2023 is **$3,050.** **EXAMPLE:** Joe, who is getting a bit older, plans to have eye surgery in 2023. For the 2023 plan year, **Joe timely elects salary reduction of $3,050 for a health FSA.** During the 2023 plan year, Joe learns that he cannot have the eye surgery performed, but incurs other medical expenses totaling $1,300. As of December 31, 2023, **he has $1,450 of unused benefits and contributions** in the health FSA. Consistent with the **use-it-or-lose-it rules** he would **forfeit the $1,450** if it is not used by March 15, 2024. The FSA approach **minimizes employee outlay** since the FSA converts what would have been** after-tax employee expenditures for the benefits selected to pretax expenditures.** - Since FSAs are funded entirely through **employee salary reductions**, the employer only bears the administrative costs. - Salary reductions elected by employees to fund the nontaxable benefits available under the plan are **not subject to income taxes or payroll taxes.** There are many nontaxable benefits available from a FSA, which include many benefits that employers **might not otherwise provide to their employees such as dependent care, dental, etc**. - An FSA must meet the **same nondiscrimination requirements as cafeteria plans.**

Answer 75

Changes from Tax Payer Certainty and Disaster Tax Relief Act of 2020. 2020 plan year end unused balances can carry over to 2021 without limit. 2021 plan year end unused balance can carry over to 2022 without limit. **Carryovers are limited to $610 in the 2023 plan year.** **Employees who ceased participation in calendar year 2020 or 2021** can receive - **reimbursement from unused benefits in the year the employee ceased participation.** Year end **grace period is extended from 2.5 months to 12 months for plan years ending in 2020 and 2021.** NOTE: CARES Act permanently expanded the definition of eligible expenses for HSA, HRA and Health Care FSA funds to **include over-the-counter drugs for expenses** incurred after December 31, 2019.

Answer 76

The Health Insurance Portability and Accountability Act **(HIPAA) established a tax favored savings account for medical expenses** called an **Archer Medical Savings Account (MSA).** The MAs could be established **after 1996 and before 2006** for employers with **50 or fewer employees and self-employed individuals.** **Employees could not establish the MSA but could contribute** (subject to the limitations discussed below) to the account **if their employer established an MSA on their behalf.** After 2005, MSAs were replaced by the Health Savings Account (HSA). **However, the MSAs that were established prior to 2006 are still in existence,** may still be maintained, and retain their tax-favored status. Contributions can be made to the MSA **by the employee or the employer.** - **Employee contributions are deductible from the employee's gross income. In addition, employer contributions are tax deductible by the employer, not subject to payroll taxes, and not taxable income to the employee.** - The aggregate contributions to the plan by the employee and the employer **cannot exceed 65% of the deductible** for individual coverage and **75% of the deductible for family coverage.** The **earnings on the assets within an MSA are tax deferred until a distribution is taken from the account.** - If a **distribution is for qualified** medical expenses, the distribution, including any earnings, is **not taxable.** - If the **distribution is not for qualified medical expenses,** the **entire distribution is taxable as ordinary income.** - In addition, if the distribution is **taken before the owner of the account is age 65,** the distribution is subject to an **additional 20% excise penalty tax.**

Answer 77

Health Savings Accounts The Medicare Act of 2003 created **Health Savings Accounts (HSAs), which are very 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. To qualify for an HSA, the **individual's health insurance plan's deductible** must be at least **$1,500 for single coverage** and the annual out-of-pocket costs cannot exceed **$7,500 for 2023.** For family coverage under an HSA, the health insurance plan **deductible must be at least $3,000, and the annual out-of- pocket costs cannot exceed $15,000** for 2023. Contributions to the HSA can be made **by the individual or by the individual's employer.** In either case, the aggregate contributions cannot exceed the health insurance plan deductible subject to a **maximum contribution of $3,850 for individuals and $7,750 for families for 2023.** Individuals between 55 years old and 64 years old, however, can make additional **catch-up contributions of $1,000** over these limits for 2023. Earnings **within the HSA are not taxable,** and amounts **distributed from an HSA are also not taxable **provided the distributions are **used to pay for qualified medical expenses.** If a distribution is **not for qualified medical expenses, the entire distribution is taxable as ordinary income. ** If the distribution is taken **before the owner of the account is 65**, the distribution is subject to an **additional 20%** excise penalty tax.

Answer 78

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.** Technically, the VEBA is either a trust or a corporation set up by an employer to hold funds used to pay benefits under an employer benefit plan. The **payments made to the VEBA are deductible by the employer** and the **income of the VEBA is tax exempt.** **VEBAs can provide:** - life insurance before and after retirement. - fitness and accident benefits (health). - severance benefits paid through a severance pay plan. - unemployment and job training benefits. - disaster benefits. - legal service payments for credits. **VEBAs cannot provide:** - savings. - retirement. - deferred compensation. - commuting expenses. - accident or home owners insurance (property and causality).

Answer 79

The premium payments for qualified group long-term care insurance are **tax deductible if paid by the employer and tax free to the employee** (see the information below for a discussion of self-employed individuals). To be a **qualified long-term care insurance plan**, the plan must meet the provisions of the IRC. **Specifically the plan must:** - Only provide long-term care insurance coverage; - Not duplicate benefits paid by Medicare; - The 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. **Long-term care premiums cannot be paid for within a cafeteria plan or flexible spending account** Nor can the **premium payment be made with pretax employee salary deferral.** If, however, the employee **pays the premiums with after-tax dollars,** - the employee **may deduct, as an itemized medical expense deduction,** the costs on his income tax return for the year.

Answer 80

An **employer may exclude from an employee's gross income the value of any retirement planning advice or information he provides** to the employee or his or her spouse if the **employer maintains a qualified retirement plan.** In addition to employer plan advice and information, the **services provided may include general advice and information on retirement.** The exclusion **does not, however, apply to**: - the value of services for tax preparation, - accounting, - legal, or - brokerage services.

Answer 81

**Disability overhead insurance** is designed to **cover the expenses that are usual and necessary expenses** in the **operation of a business** should the owner become **disabled.** **Premiums are deductible as a business expense,** and **benefits payable from the plan are taxable income** to the entity. **Disability buyout policies:** - are **policies to cover the value of an individual's interest in the business** should they become disabled.

Answer 82

Key employee life insurance is **NOT an employee benefit.** The company/employer **purchases life insurance on a key employee**, making **nondeductible premium payments** and receiving a **tax-free death benefit. ** If the **employee is greater than a 50% owner,** he/she is **assumed to have incidents of ownership** making the **proceeds taxable in his/her estate. ** The **proceeds may also be indirectly taxable in the decedent's estate** to the extent **his/her stock value in the company is increased due to the proceeds.** **Lastly, life insurance death proceeds are not taxable to a corporation** - for **regular tax purposes** but they are for AMT.

Answer 83

Split-dollar life insurance is an arrangement where an **employee and employer generally share the premium costs and cash value or death benefit of a life insurance policy** - covering the life of the employee. The purpose of the split benefit is **to reimburse the employer's share of the premium cost of the policy.** This is typically done with the **death benefit reimbursement** - in the amount of the premiums paid or, - if the policy is surrendered, the amount of the premiums paid or the entire cash value. **There are several ways to structure the premium split that are Listed Below:**

Answer 84

***Standard split-dollar plan:*** - 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 employer's "investment" is fully secured. ***Disadvantages:*** - High premium payments required by the employee early on.

Answer 85

***Level premium plan:*** - the **employee's share of the premium cost is level** over a specified period of time (e.g. 5 or 10 years) ***Advantages:*** - Does not require the high premium payments by the employee. ***Disadvantages:*** - If terminated early, the employer's reimbursement, if limited to cash value, is not fully recognized

Answer 86

***Employer pay all plan:*** - the **employer** pays the entire premium. ***Advantages:*** - The employee does not have to come out of pocket yet receives life insurance protection. ***Disadvantages:*** - The employee must recognize taxable income based on the Table 2001 rates. If terminated early, the employer's reimbursement, if limited to cash value, is not fully recognized.

Answer 87

***Offset plan:*** - the **employee pays the Table 2001 cost**, if applicable, and the **employer pays the remainder.** - This effectively **"zeros out" the employee's income tax cost for the plan.** ***Advantages:*** - The **employee's cost is minimal** and this offers the potential that the **employer provides a special "bonus"** in the amount **owed by the employee.** - Although the premiums paid are not tax-deductible, the **bonus amount is tax deductible.** ***Disadvantages:*** - If terminated early, the **employer's reimbursement**, if limited to cash value, is **not fully recognized.**

Answer 88

There are also several methods to structure the cash value or death benefit split: - The amount of the premiums paid; - The cash value; or - The greater of the cash value or premiums paid.

Answer 89

Answer: $15,000; the greater of premiums paid ($3,000 x5) or cash value ($6,000).

Answer 90

***Endorsement method:*** - The ***employer*** owns the policy and is primarily **responsible for making the premium payments.** - The **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. ***Advantages:*** - The **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**

Answer 91

***Collateral assignment:*** - The **employee owns the policy and is primarily responsible for making the premium payments.** - The **employer makes interest-free loans to the employee in the amount of the premium the employer is responsible for.** - Once again, the employee may elect a beneficiary but the **employer is paid a portion of the death proceeds**. ***Advantages:*** - The **plan provides more protection for the employee and emplovee's beneficiary** and - can be **implemented easier with existing life insurance owned by the employee.**

Answer 92

The employe**R** owns the policy if it is endo**R**sement method

Answer 93

If Julio's employer creates a split-dollar agreement with him under the endorsement method the employer owns the policy, the employer and employee share in the premium payments (actual split depends on the agreement), and cash value, if surrendered, or death benefit is first used to reimburse the employer for premiums paid and the remainder goes to the employee/ beneficiary.

Answer 94

If Julio's employer instead uses the collateral assignment method, the employee owns the policy, the employer and employee share in the premium payments (actual split depends on the agreement), and cash value, if surrendered, or death benefit is first used to reimburse the employer for premiums paid and the remainder goes to the employee/beneficiary.

Answer 95

Taxation depends primarily on the method chosen. For all methods, the **employer does not receive a deduction for premiums** paid and the **death proceeds are tax-free.** - The **endorsement method** and non-equity-type collateral assignment plans require that the **employee recognize income** in the amount of the **pure death benefit** under Table 2001 **less any amount contributed** to the plan by the employee. The **employee is also taxed on any cash value that the employee gains** access to during the year. - For equity-type **collateral assignment** plans the premium amounts "loaned' to the employee are deemed "demand loans" if there is **no stated interest rate.** The tax treatment is additional compensation income to the employee in the amount of the **assumed interest payable based on the applicable federal rate (AR).** The **employer gets a deduction for the assumed income paid and the employee must report the income on his/her tax return.** Then the **employee pays the employer the assumed interest**, providing interest income to the **employer and an interest deduction, subject to standard limitations,** to the employee.

Answer 96

Answer: The total premium is $2,830 = ($500,000 ÷ $1,000 x 5.66). Since he only pays $2,000 the recognizable income is $830. = ($2,830 - $2,000)

Answer 97

Answer: The interest piece is $100 = ($2,000 x0.05). The employer gets a deduction for compensation income paid in the amount of $100, Paul must recognize $100 of ordinary compensation income, the company must recognize $100 of interest income, and Paul may be able to deduct the $100 of interest.

Answer 98

This type of insurance provides **coverage for business expenses,** not including the owner's wages, in **the event the business owner becomes totally disabled.** The policy may have varying lengths, but **1 or 2 years is typical.** Policy **premiums are deductible business expenses** and the income is **generally taxable.**

Lesson 5 of Retirement Benefits: Deferred Compensation and Employee Benefits Flashcards

(134 cards)