One way you can find and keep valuable employees is to offer the best compensation
package possible. An important part of any compensation package is fringe benefits,
especially tax-free ones. From an employee's perspective, one of the most important
fringe benefits you can provide is medical coverage. Disability, life, and long-term
care insurance benefits are also significant to many employees. Fortunately, these
types of benefits can generally be provided on a tax-free basis to your employees.
Let's look at these and other common fringe benefits.
- Medical coverage. If you maintain a health care plan for your
employees, coverage under that plan isn't taxable to them. Employee contributions
are excluded from income if pretax coverage is elected under a cafeteria plan;
otherwise, such amounts are included in their wages, but are deductible on a
limited basis as itemized deductions.
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. Your disability insurance premium payments
aren't included in your employee's income, nor are your contributions to a trust
providing disability benefits. The employees' premium payments (or any other
contribution to the plan) generally are not deductible by them or excludable from
their income. However, they can make pretax contributions to a cafeteria plan for
their disability benefits; such contributions are excludable from their income.
- 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 aren't taxable to your
employees. However, long-term care insurance can't be provided through a
- Life insurance. Your employees generally can exclude from gross
income premiums you pay on up to $50,000 of qualified group term life insurance
coverage. Premiums you pay for qualified coverage exceeding $50,000 is taxable to
the extent it exceeds the employee's contributions toward coverage.
- Retirement plans. Qualified retirement plans that comply with a
host of requirements receive favorable income tax treatment, including (1)
current deduction by you, 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 pretax 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 during the year. The dependent care services must be
necessary for the employee's gainful employment.
- Adoption assistance. Generally, in 2015, employees can exclude
from income qualified adoption expenses of up to $13,400 for each eligible child
paid or reimbursed by you under an adoption assistance program.
- 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
Benefits provided to self-employed individuals. Generally, different
and less favorable tax rules apply to certain fringe benefits provided to
self-employed individuals, including sole proprietors (including farmers), partners,
members of limited liability companies (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 a bona fide employee
of the business, but not an owner, the business may be able to provide tax-free
benefits to the spouse just like any other employee.
This publication is distributed with the understanding that the author, publisher and
distributor are not rendering legal, accounting or other professional advice or
opinions on specific facts or matters, and, accordingly, assume no liability
whatsoever in connection with its use. The information contained in this newsletter
was not intended or written to be used and cannot be used for the purpose of (1)
avoiding tax-related penalties prescribed by the Internal Revenue Code or (2)
promoting or marketing any tax-related matter addressed herein. © 2015