1. W-2’s & Other Tax Reporting John M. Lauer, MST State & Local Government Tax Specialist Internal Revenue Service

2. Overview of Topics Accountable Plans Medicare Premiums Paid Group Term Life Insurance Tuition Reimbursement over $5,250 iPads or other gifts Roth 403(b) plans Death of an Employee

3. Accountable Plans What is an Accountable Plan? - An allowance or reimbursement policy under which amounts are nontaxable to the recipient if three requirements are met. 1.Business Connection 2.Adequate accounting w/in reasonable time 3.Excess amounts returned w/in reasonable time

4. Accountable Plans Business Connection Expense incurred in connection with services of an employee Would otherwise be deductible on personal 1040 if Employer did not reimburse (Treas. Reg. 1.62-2(d)

5. Accountable Plans Adequate Accounting Date, time, place, amount, and business purpose Receipts required unless under per diem plan [Treas. Reg. 1.274-5T(b)(2)] Documentary Evidence

6. Accountable Plans Timely Return of Excess Must meet test of timeliness - Fixed Date Method - Periodic Statement Method - Other Reasonable Method

7. Medicare B Premiums IRC 106 Exclusion from gross income Employer-provided insurance coverage Must be under accountable plan

8. Medicare B Premiums A school district reimburses the cost of Medicare B Premiums for retirees. Is this a taxable event? ANSWER: It depends on the facts & circumstances. Accountable plan v. Non Accountable Plans Acctble = tax free, Non-Acctble = taxable

9. Group Term Life Insurance IRC 79 First $50,000 excluded from taxable income Carried directly or indirectly See tables in Treas. Reg. 1.79-3(d) Subject to Social Security & Medicare withholding only (No FITW)

10. Group Term Life continued Carried Directly or Indirectly by an Employer: - Employer pays any cost of the insurance - Employer arranges for premium payments and premiums paid by at least one employee subsidize those paid by at least one other employee (“straddle rule”) Benefit provided through redistributing rule

11. Group Term Life continued Does this apply even if the employees are paying the full cost of coverage? ANSWER: YES, a benefit is still being provided. However, the employee would reduce the taxable benefit by the amount paid through the year.

12. Group Term Life continued What if the employer does not pay any part of the premium and they do not use redistributing of premium costs? Is there still a taxable event? ANSWER: NO, the employees are paying their full amount and none of the employees’ premiums are being subsidized by others

13. Group Term Life continued If more than 1 insurer, then all policies must be analyzed separately Coverage for spouse or dependents $2,000 threshold, face amount of coverage De Minimus Use same tables and computation if the $2,000 is exceeded

14. Group Term Life continued If part of my spouses coverage is determined to be taxable, do I exclude the $2,000 threshold? ANSWER: NO, The entire value is used in computing the taxable fringe benefit. Do not reduce it by the $2,000 threshold

15. Group Term Life continued COMPUTATION EXAMPLE: John – 58 yrs old, still an employee participating in the plan, receives $150,000 of coverage for the full year Step 1 – determine excess ($150k - $50k = $100k in excess) Step 2 – refer to tables in Treas. Reg. 1.79-3(d) to determine cost per $1,000 per month

16. Table under Treas. Reg. 1.79-3(d) Cost per $1,000 of Protection for 1 month Amount Under Age 25 $ 0.05 25 through 29 $ 0.06 30 through 34 $ 0.08 35 through 39 $ 0.09 40 through 44 $ 0.10 45 through 49 $ 0.15 50 through 54 $ 0.23 55 through 59 $ 0.43 60 through 64 $ 0.66 65 through 69 $ 1.27 70 and older $ 2.06

17. Group Term Life continued Step 3 – compute benefit {$100k / $1,000 = $100} {$100 x.43 = $43 per month} {12 months x $43 = $516 for the year} Step 4 – reduce benefit by amount paid out of pocket (ex: John paid $16 out of pocket for the year) {$516 - $16 = $500}

18. Group Term Life continued Step 5 – Report the $500 taxable fringe benefit on Form W-2 Report benefit in box 12 and indicate correct code – $500, mark code “c” If the employee is a retiree, use the same process, but mark code “m”

19. Tuition Reimbursement IRC 127(a)(2) Requirements to be excludable: - written plan - no alternative benefit to education - $5,250 limit per employee - no discrimination (highly compensated)

20. Tuition Reimbursement Eligibility - Current Employees - Laid Off Employees - On Leave Employees - Employees retired on disability {Per Treas. Reg. 1.127-2(h)}

21. Tuition Reimbursement Qualifying Expenses: - Tuition, Books, Supplies, & Equipment for class Does not cover supplies/equipment that may be kept after the course is over [IRC 127(c)(1)]

22. Tuition Reimbursement How do you treat tuition reimbursements in excess of $5,250? ANSWER: Include the excess as a taxable fringe benefit subject to the proper tax withholdings. W-2 Boxes 1, 3, 5 wages subject to applicable withholdings

23. Awards & Gifts IRC 74(c) Government Employers may provide awards and prizes to employees. These awards/prizes are taxable unless specifically excluded by the IRC. Nontaxable Awards IRC 74(b), 74(e)(4), & 74(c) CASH PRIZE/AWARDS = TAXABLE

24. Awards & Gifts continued IRC 74(b) – awards or prizes transferred to charities Requirements: - past achievement - selected w/o entering contest - no future conditions attached - transferred to charity prior to receipt

25. Awards & Gifts continued IRC 74(e)(4) – de minimus awards & prizes Ex: nominal gifts for b-days, holiday turkeys, performance awards of little value If the award exceeds either the value or frequency limitations, then the entire award is a taxable fringe benefit. (it is not just the amount that exceeds the threshold) Per Treas. Reg. 1.132-6(d)(4)

26. Awards & Gifts continued (de minimus explanation) De Minimus threshold NO set dollar amount Courts have determined various amounts Acceptable de minimus fringes have ranged from $15 to $23 Gift cards generally taxable (especially if there’s multiple uses)

27. Awards & Gifts continued IRC 74(c) – certain employee achievement awards See Prop. Treas. Reg. 1.274-8(2)(b)(iv) for listing of items which are not excluded Length of service – 1 st 5 yrs & every 5 yrs Safety Achievement – EE’s less than 1 yr, < 10% of eligible EE’s

28. Awards & Gifts continued If the award or gift does not fall into the nontaxable exclusion, then the amount/value is reported as a taxable fringe benefit Include this amount in Box 1 wages of the W-2 This amount is subject to SS and MED, unless the employee’s position is not covered by SS and MED

29. Roth 403(b) Plans Traditional 403(b) plans – tax sheltered annuities - reduces your current taxable income - tax deferral - Form W-2, box 12, code E

30. Roth 403(b) Plans ROTH 403(b) plans - elective contributions included in gross income and taxed now - tax free distributions during retirement under certain conditions - Form W-2, box 12, code BB (important distinction)

31. Roth 403(b) Plans Irrevocable designations Traditional + Roth 2012 Elective Deferral Limits = $17,000 2012 Catch up Contributions = $5,500 IRC 402(g)

32. Roth 403(b) Plans Designated Roth Account Employer/Plan Administrator responsible for tracking Roth contributions, gains & losses until account balance is completely distributed Keep separate IRC 402(a) - separate account requirement

33. Deceased Employee Must report accrued wages, vacation, and other compensation after the date of death Payment made in same year of death, then wages are subject to Social Security & Medicare withholdings, NO FITW Payment made in the year following, then no tax withholdings are necessary

34. Deceased Employee EXAMPLE Before Employee A’s death on June 15, 2012, A was employed by Employer X and received $10,000 in wages in which FIT of $1,500 was withheld. When A died, Employer X owed A $2,000 in wages and $1,000 in accrued vacation pay (Total of $3,000). $3,000, LESS SS & MED W/H, was paid to A’s estate in July 2012.

35. Deceased Employee EXAMPLE CONTINUED Because Employer X made the final payment in year of death, SS & MED withholdings apply. FORM W-2 Box 1 - $10,000; Box 2 - $1,500; Box 3 - $13,000, Box 4 – applicable SS W/H; Box 5 - $13,000; Box 6 – applicable MED W/H

36. Deceased Employee Must also report the final payment on Form 1099-MISC, box 3, to the estate or beneficiary whether or not the payment was made in year of death or after (Rev. Rul. 86-109, 1986-2 C.B. 196) Death and retirement benefits – 1099-R

37. Resources http://www.irs.gov/govt/fslg/index.html http://www.socialsecurity.gov/employer/ IRS Monthly Phone Forums Online Webinars FSLG Directory

38. THE END THANKS FOR YOUR ATTENDANCE!