Employee-Benifit-Plan-Audit-Brochure[fusion_builder_container hundred_percent=One way to attract and retain valuable employees is to offer the best compensation package possible. An important part of any compensation package is fringe benefits, especially those that are tax-free to your employees. One of the most important fringe benefits is health insurance. Disability, life, and long-term care insurance can also be important in your benefits package. Fortunately, there are ways to provide these types of benefits without your employees being taxed on the value.  The following lists some of the more common fringe benefits, and tax considerations for each.

  • Health Insurance.If you maintain health insurance for your employees, coverage under that plan is not taxable to them. This can be true even if you require the employee to pay part of the premium. Employees can use a cafeteria plan with pre-tax coverage to pay their portion of health insurance premiums. The cafeteria plan allows the employee to subtract the amount of the premium from their wages before tax is calculated (a pre-tax basis).  Caution: Employers must meet a number of new requirements when providing health insurance coverage to employees. For instance, benefits must be provided through a group health plan (either fully insured or self-insured). Reimbursing an employee for individual policy premium payments can subject the employer to substantial penalties.
  • Disability insurance.Payments an employer makes for disability insurance premiums are not included in your employee’s income, nor are your contributions to a trust providing disability benefits. If the employee pays the premium (or makes any other contribution to the plan), these payments are generally not deductible by them.  However, they can make pretax contributions to a cafeteria plan to cover their disability premium. It is worth noting that if an employee ever needs to claim disability payments from the policy, how the premium was paid will determine if the disability payments will be taxable income to the employee.

    • Taxable – If the employer pays the total premium, and does not add the cost to the employee’s gross income, then any disability payments from the policy will be taxable income to the employee.
    • Non-Taxable – If the employee pays the premium with after-tax dollars, then any disability payments from the policy will be non-taxable income to the employee.
    • Partially Taxable – If the employee pays part of the premium with after-tax dollars, and part with pre-tax dollars, through employer contributions or through a cafeteria or medical reimbursement plan, then any disability payments from the policy will be partially taxable income to the employee.
  • Long-term care insurance. Plans providing coverage under qualified long-term care insurance contracts are treated as health plans. Accordingly, your premium payments under such plans are not taxable to your employees.  Unlike health insurance, long-term care premiums cannot be provided through a cafeteria plan.
  • Life insurance. The value of premiums you pay for up to $50,000 of qualified group term life insurance coverage is not taxable to your employees. Premiums you pay for qualified coverage exceeding $50,000 is taxable to the extent it exceeds the employee’s contributions toward the coverage.
  • Retirement plans. Qualified retirement plans that comply with a host of requirements receive favorable income tax treatment, including (1) current deduction by the employer for contributions to the plan; (2) deferral of the employee’s tax until benefits are paid; (3) deferral of taxes on plan earnings; and (4) in the case of 401(k) plans and SIMPLE plans, the employee’s ability to make pre-tax contributions.
  • Dependent care assistance. You can provide your employees with up to $5,000 ($2,500 for married employees filing separately) of tax-free dependent care assistance each year. The dependent care services must be necessary for the employee’s gainful employment. Though the value of these benefits gets noted on the employee W2, the employee will not be taxed if they can substantiate, through Form 2441, that the amount was spent on qualified childcare.
  • Adoption assistance. Generally, in 2016, employees can exclude from income qualified adoption expenses of up to $13,460 for each eligible child paid or reimbursed by their employer under an adoption assistance program. The amount of adoption assistance payments is reflected on the employee W2.  The employee then uses Form 8839 to reflect the qualified adoption expenses that the employer reimbursed.
  • Educational assistance. You can help your employees with their educational pursuits on a tax-free basis through educational assistance plans (up to $5,250 per year), job-related educational assistance, and qualified scholarships.

Benefits provided to self-employed individuals. Less favorable tax rules apply to certain fringe benefits provided to self-employed individuals, including sole proprietors, partners in a partnership, members of LLCs electing to be treated as partnerships, and more-than-2% S corporation shareholders. However, except in the case of a more-than-2% S corporation shareholder, if the owner’s spouse is not an owner, but is a bona fide employee of the business, the business may be able to provide tax-free benefits to the spouse just like any other employee.