Unit 5: Employee Compensation and Fringe Benefits

Question 1

Employers can deduct the compensation it provide their employees if all of the following tests are met:

Answer 1

• The payments must be ordinary and necessary expenses directly related to the trade or business
• The amount must be reasonable
• There must be proof that services were actually performed
• The expenses must have been paid or incurred during the tax year.

Question 2

Supplemental wages may include the following:

Answer 2

• Bonuses, commissions, and overtime pay
• Taxable awards
• Payments for accumulated sick leave
• Back pay
• Retroactive pay increases
• Severance pay
• Payments for nondeductible moving expenses

Question 3

If an employer transfers property to an employee, the employee must:

Answer 3

Recognize the property as taxable compensation on the date of the transfer

Question 4

If an employer transfers property to an employee, the employer will:

Answer 4

Recognize a gain or loss on the transfer equal to the difference between the FMV and its basis in the property

Question 5

If an employee’s wages are paid in property rather than money, who is responsible for ensuring that the amount of payroll tax required to be withheld is available for payment in money?

Answer 5

The employer

Question 6

What employment taxes can a business deduct on?

Answer 6

• Amounts paid as the employer’s share of SS and Medicare taxes, as well as state and federal unemployment and disability fund taxes.

Question 7

Examples of taxable fringe benefits”

Answer 7

• Off-site athletic facilities and health club memberships
• Concert and athletic event tickets
• Intangible property such as vacations, stocks, or securities
• The value of employer-provided life insurance over $50,000
• Any cash benefit or benefits in the form of a credit card or gift card
• Transportation benefits, if the value of a benefit for any month is more than a specified nontaxable limit
• Employer-provided vehicles, if they are used for personal purposes or commuting

Question 8

What is a “Section 125 plan”?

Answer 8

Also known as a “cafeteria plan”

This is a written benefit that provides employees an opportunity to choose between receiving at least one taxable benefit, such as cash, and on qualified (nontaxable) benefit

A cafeteria plan is the only way an employer can offer employees a choice between taxable and nontaxable benefits without the choice causing all the benefits to become taxable.

Question 9

Qualified cafeteria plan benefits may include:

Answer 9

• Accident and health insurance benefits, including dental and vision insurance (not LTCi)
• Adoption assistance
• Group-term life insurance
• HSAs, including distribution to pay for long-term care services
• FSAs, including DCFSAs and HCFSAs

Question 10

If a cafeteria plan favors either “highly compensated employees” or “key employees” as to eligibility to participate, what happens?

Answer 10

The employer must include contributions or benefits in their taxable income of the value that the benefits we worth.

Question 11

What is the major disadvantage of a cafeteria plan?

Answer 11

They are costly and time-consuming.

Question 12

What is a “Key employee”?

Answer 12

Officers or owners of a business who at any time during the year before the testing date were:
- Company officers making over $200,000
- Business owners holding more than 5% of stock or capital, regardless of salary
- Owners earning over $150,000 and holding more than 1% of ownership in the company.

Question 13

A highly compensated employee is an individual who:

Answer 13

• Owned more than 5% of the interest in the business at any time during the year or the preceding year, regardless of compensation, or

0 For the preceding year, recieved compensation of more than $135,000 (2022) and $150,000 (2023) and was in the top 20% of employees when ranked by compensation.

Question 14

highly compensated employees hired in the middle of the year will not receive HCE status until:

Answer 14

The start of the following year when they are eligible to collect the entirety of their salary

Question 15

A plan is considered to have improperly “favored” HCEs and key employees if:

Answer 15

More than 25% of all the benefits are given to those highly-paid employees

Question 16

DCFSA limit:

Answer 16

$5,000 per calendar year, per family

Question 17

HCFSA limit:

Answer 17

$2,850

Question 18

FSA “use-it-or-lose-it” rule: what are some employer options?

Answer 18

• An unlimited carryover, which allows participants to carry over up to $570 in 2022 of their unused healthcare FSA balances remaining at the end of the year
• Or, a company may also choose to allow an employee a grace period of up to two-and-a months from the end of the plan year to use the remaining balance
• Health care FSA plans can elect either the carryover or grace period but not both.

Question 19

What is QSEHRA?

Answer 19

Qualified Small Employer Health Reimbursement Plan

• Allows small employers with fewer than 50 full-time employees who do not offer a group health plan to reimburse their employees individual health coverage premiums.

Question 20

QSEHRA: Maximum benefit?

Answer 20

$5,450 for self-coverage
$11,050 for family coverage

Question 21

What type of vehicle is automatically qualified as a “nonpersonal-use” vehicle?

Answer 21

Any vehicle designed to carry cargo over 14,000 pounds

Question 22

What is an accountable plan?

Answer 22

Amounts paid under an accountable plan are deductible by the employer, but they are not taxable wages and are not subject to income tax withholding or payment of SS, Medicare, and FUTA taxes. It is the sole discretion of an employer whether to establish an accountable plan.

Question 23

What is a nonaccountable plan?

Answer 23

Amounts paid under a nonaccountable plan are taxable to employees as wages and are subject to all employment taxes and withholding. Generally, there are no substantiation requirements for a nonaccountable plan.

Question 24

For expenses to qualify under an accountable plan, employees are required to:

Answer 24

• Have incurred expenses while performing services as employees
• Adequately account for the expenses within a reasonable period of time
• Provide documentary evidence of travel, mileage, and other employee business-related expenses
• Return any excess reimbursement or allowance to the employer within a reasonable period of time, if paid in advance/ A cash advance must be reasonably calculated to what the anticipated expenses and the employer must make the advance within a reasonable period of time

Question 25

“Qualified plan awards” are employee achievement awards under a written plan that does not discriminate in favor of highly compensated employees. An employer’s deduction and the tax-free amount for each employee are limited each year to the following:

Answer 25

• $400 for awards that are not “qualified plan” awards
• $1,600 for all awards, if an employee receives both qualified and non-qualified awards during the year.

Question 26

An employer may exclude from taxable wages the value of meals and lodging it provides to employees if they are provided:

Answer 26

• On the employer’s business premises, such as in an employer’s cafeteria
• For the employer’s convenience

Question 27

How much can an employer deduct from snacks and drinks provided to employees?

Answer 27

50% of the cost

Question 28

Situations in which meals may be provided tax-free to employees for the convenience of the employer on the employer’s business premises include the following:

Answer 28

• Safety workers such police, firefighters, and other emergency personnel need to be on call for emergencies during the meal period
• The nature of the business requires short meal periods
• Eating facilities are not available in areas near the workplace
• Meals are furnished to all employees on a regular basis, as long as meals are furnished to more than half of the employees for the convenience fo the employer
• Meals are furnished immediately after working hours because the employee’s duties prevented him from obtaining a meal during working hours.

Question 29

Job-related education: The amounts would be nontaxable to the employee, and fully deductible by the employer if the education:

Answer 29

Maintains or improves skills required by the individual’s current employment, trade, or business
- Meets the express requirements of the employer, or the requirements of applicable law or regulations, imposed as a condition to the individual’s retention of salary, status, or employment

Question 30

Non job-related education: limits?

Answer 30

$5,250 per year. If an employer pay more than that, the excess is taxed as wages to the employee.

Question 31

What are “no-additional-cost” services?

Answer 31

Excess capacity services, such as airline, bus, or train tickets; hotel rooms; or telephone services provided free or at a reduced price to employees working in those lines of business.

These expenses can excluded from an employee’s taxable income if the value provided to the employee does not create a substantial additional cost for the business.

Question 32

Employee transportation benefits: In 2022, employees can exclude the following amounts:

Answer 32

• $280 per month in combined commuter highway vehicle transportation and transit passes, and
• $280 per month in parking benefits. Employees can receive both transit passes and parking benefits during the same month; they are not mutually exclusive.

Question 33

What does ACA mean?

Answer 33

Affordable Care Act

Question 34

What does ALE mean?

Answer 34

Applicable Large Employer: an employer with 50 full-time employees (or a combination of full-time and part-time employees that is the hourly equivalent of 50 full-time employees)

Question 35

What does FTE mean?

Answer 35

Full-time employee

Question 36

What does MEC mean?

Answer 36

Minimum Essential Coverage

Question 37

For ACA purposes, a “full-time employee” is an individual employed on average:

Answer 37

At least 30 hours per week, or at least 130 hours in a calendar month.

Question 38

Section 4980h(A) Penalty:

Answer 38

Failure to Offer Minimum Essential Coverage:
- This is a penalty for not offering health insurance. An employe may be liable for this penalty if they are classified as an applicable large employer and do not offer minimum essential coverage to at least 95% of the full-time employees (and their dependents) and at least one employee receives the Premium Tax Credit.

-For 2022 the penalty amount is $2,750 for each full-time employee, this is not provided with minimum essential coverage (after excluding the first 30 full-time employees from the clcualtion)

Question 39

Section 4980H(b) Penalty:

Answer 39

Failure to offer coverage that is affordable and provides minimum value

• An ALE may be liable for this penalty if the employer does offer health insurance, but at least one full-time employee receives the Premium Tax Credit
• The penalty is based solely on the number of full-time employees who receive the Premium Tax Credit and the penalty is $4,120 for each full-time employee.

Question 40

For ACA purposes, an employer health plan meets the “minimum value” standard if both of the following apply:

Answer 40

• The insurance is designed to pay at least 60% of the total cost of medical services
• The insurance benefits include substantial coverage of physician and inpatient hospital services.

Question 41

Employers may not impose enrollment waiting periods for health plans longer than?

Answer 41

90 days