Taxation of employee benefits

Question 1

Premiums paid by taxpayer

Answer 1

not deductible

Question 2

Premiums paid by taxpayer’s employer

Answer 2

excluded from taxpayer’s income; deductible by employer

Question 3

Benefits received by the taxpayer from a policy paid for by the taxpayer

Answer 3

excluded from income

Question 4

Benefits received by the taxpayer from a policy paid for by the employer

Answer 4

included in income

Question 5

Life Insurance Premiums—Those paid by an employer are excluded on the basis of group-term life insurance

Answer 5

The limit on this exclusion is the amount of premiums necessary for a $50,000 face value group-term policy.

For amounts over $50,000, the insurance benefits are taxable based on the rates in an IRS table. The rates are based on the age of the taxpayer.

Note that this exclusion applies only to term life insurance policies. If an employer pays premiums on a whole-life insurance policy for an employee the value of those premiums are included in income.

Question 6

Health insurance premiums

Answer 6

Those paid by an employer are excluded
Employer paid premiums for disability insurance plans and long-term care policies are also excluded from income.
Employer paid premiums for wage continuation insurance are included in income

Question 7

Self-employed individuals

Answer 7

Self-employed individuals can deduct 100% of health insurance premiums paid for coverage of self, spouse, and dependents. However, the deduction cannot exceed the taxpayer’s net earnings from self-employment.

Question 8

Personal Expenses Paid by Employer

Answer 8

If an employer pays the expenses of an employee, the payment is income to the employee because it is compensatory in nature

Question 9

Working Condition—Fringe benefits are excluded from the employee’s income

Answer 9

A working condition benefit is a benefit provided by the employer that would be deductible (as an employee business expense) if the employee had instead paid the expense

Question 10

Employee Discounts—These are excluded if the discount is not excessive (except on realty and marketable securities)

Answer 10

The discount is limited to 20% of the value of services.

The limit on the discount for purchases of merchandise is the average gross profit percentage for the employer.

Question 11

Safety and Length of Service Achievement Awards—Are excluded from income and are subject to a limit of $400 if not a qualified plan, and $1,600 if part of a qualified plan.

Answer 11

The award will be taxed if it is made in cash. “Cash” includes gift cards, gift coupons, gift certificates, vacations, meals, lodging, tickets for theater and sporting events, stock, bonds, and other nontangible personal property.

The award can be given only because of length of service or safety records.

The award can be given no more than once every five years.
The length of service award is $6,000 for bona fide volunteers engaged in fire fighting, emergency medical services, and ambulance services.

Question 12

Transportation and Parking

Answer 12

Employer reimbursements for mass transit transportation ($270 per month) and parking ($270 per month) are excludible up to the limits shown in 2020.

Reimbursement for commuting with a bicycle are included in income.

Question 13

Qualified excludible benefits

Answer 13

Employees can exclude (up to $5,000; $2,500 if married filing separately) from gross income the value of child and dependent care services provided by the employer, if the services are provided so that the employee can work.

Employees can exclude (up to $5,250) from gross income the value of assistance provided by the employer for undergraduate and graduate tuition, fees, books, and supplies. Certain payments made by employers to repay an employee’s student loans are also eligible for this exclusion up to the annual maximum of $5,250. This applies to payments from May 28 through December 31 of 2025.

Employees can exclude from gross income up to $14,400 (2021) of expenses incurred to adopt a child, if these expenses are reimbursed by the employer. The exclusion is phased-out at AGI levels between $216,600 and $256,600 (2021).

If the adoption expenses are not reimbursed by the employer, the taxpayer receives a nonrefundable credit for qualified adoption expenses up to the same $14,400 limit per child.

Use of athletic facilities provided at a location owned or leased by the employer are excluded. This benefit applies to the employee, the employee’s spouse and dependents as well as retirees.

Employer-provided retirement advice is excluded.

Qualified tuition reduction by nonprofit educational institutions is excluded and applies to the following: the employee; the employee’s spouse and dependents; and undergraduate education, except for graduate students who receive tuition waivers for serving as a graduate assistant.

Benefits paid to the family of a deceased employee are included in income.

Question 14

Flexible Spending Accounts (FSAs)

Answer 14

are accounts set up by employers to allow their employees to contribute a portion of their salary (pretax funds) to an account. The funds in the account must be used during the tax year to pay for specific expenses of the taxpayer. Specifically, accounts can be created to pay medical, dependent care, or adoption expenses. One drawback of an FSA is that any funds not used by the end of the tax year (may be extended to 2½ months after year-end at option of employer) are forfeited by the employee.

Question 15

If a benefit is discriminatory

Answer 15

then the highly compensated employees are taxed on the fair market value of the benefit.

Question 16

Accountable Plans

Answer 16

If employee business expenses are reimbursed under an accountable plan, then the reimbursement is not taxable (for FICA or income tax) and the employee gets no deduction for the expense. Technically, the tax law requires the reimbursement to be included as income and the employee’s deduction is for AGI. Since this always nets to zero, the IRS allows the income and deduction to not be reported.

Question 17

If the expenses are reimbursed, but not under an accountable plan,

Answer 17

the reimbursement must be included in income (for FICA and income tax) and no deduction is allowed. If the expenses are not reimbursed, no deduction is allowed for the expenses.

Question 18

For a plan to be accountable:

Answer 18

It must substantiate all expenses to be reimbursed; and

Excess reimbursements must be returned to the employer.

Question 19

cafeteria plan

Answer 19

Under a cafeteria plan, an employee can choose between cash and certain “qualified benefits.”

Cash is treated as wages.

Qualified benefits include
Benefits/coverage under accident or health plans
Long-term or short-term disability coverage
Group-term life insurance coverage
Dependent care assistance programs
Section 401(k) plans
Contributions through health savings accounts
Adoption assistance

Question 20

Key Dates for Stock Options

Answer 20

1. Grant date—Date the option is granted to employee.
2. Exercise date—Date that the option is exercised and the stock is purchased.
3. Sale date—Date that the stock is sold.

Question 21

Nonqualified Stock Options

Answer 21

No income is recognized when the option is granted.
On the exercise date, the employee-recognized ordinary income is equal to:
(FMV of stock − Exercise price) × # of shares exercised.

The employer receives a salary deduction for this same amount.
The employee has a basis in the stock equal to its FMV on the exercise date. When the stock is later sold, this basis is used in computing the gain/loss from the sale.