Benefits Credit

[GBurns]

I am seeking examples of how Benefits Credits are explained to employees. It would be helpful if there were sample figures or examples.

I have a prospective client whose use of Benefits Credits has me asking questions.

For example, the Benefit Credit is $500 per month, the Health Insurance premium is $650 of which the employee share is $150.

This employer pays the $500 to the employee as Taxable Income then has the employee do a section 125 Salary Reduction of $650. The logic is that the employee is paying the difference which happens to be the same as what is the employee share of the premium.

My experience is that the $500 should not be paid but should exist as a "notional" amount which is spent down with any amount needed becoming the amount of the Salary Reduction amount.

I would greatly appreciate some input and enrollment forms with examples which I can use to explain what should be done.

[Guest taxesquire]

Hmmm...in the situation you described, where benefit credits must be applied towards a particular benefit, I generally describe taht as an "employer cotnribution." I use the term "benefit credit" (actually, I use "cafeteria plan credits" or "flex credits") to refer to a situation where the employer gives employees a sum and they can direct it as they see fit.

The way I describe these credits is as follows: The employer will set-aside $______ (or $_____ per month)of benefits credits for you to allocate among the benefits availabel to you.

Then, I like to have them allocated to the commercially insured benefits before going into an FSA.

Hope this helps!

[J Simmons]

If the ER credits are, as you mentioned, added to each EE's paychecks but the EE can choose which benefits to apply them or simply take the extra cash pay remaining after tax, you might consider this language:

"Each worker's needs and situation is different. Rather than choose which benefits will be provided you, we've instead included all compensation for your work in your pay rate and offer a cafeteria plan for you to choose which benefits, if any, you want. Your pay will be deducted--on a tax-free basis--to pay for the benefits you choose. This gives you the flexibility to apply your pay as you see fit, and provides you tax savings if you do choose and pay for certain types of benefits using the cafeteria plan."

[Jacmo]

To have a 125 plan there must be a choice between nontaxable benefits and cash. If I take health insurance and sign the 125 form for a reduction of $650, then decide to cancel (for a qualifying event), I don't get the 650 as cash. I only get 150. Therefore, the 650 election is not a true representation of the facts.

This looks more like a scheme to rip off extra FICA savings for the employer.

[masteff]

While I like J Simmons suggested approach, only problem I see is making sure people realize the difference between their base salary and their benefits stipend. The trouble I foresee is how future raises/bonuses are calculated against base salary and the potential for changes to the benefit credit.

I'd work something in to J's paragraph to the effect of "Your compensation is composed of your base salary plus a $500 per month benefit credit. This credit is yours to keep or to apply toward benefits in the cafeteria plan."

Might also consider a short paragraph about the credit being subject to change or cancellation and is not a part of base salary. Just a short disclaimer that the company has the right to modify the program design as it sees fit.

GBurns, just being curious, so by adding it to their TI, are they able to make 401(k) deferrals based on this higher TI (i.e., is the benefit credit treated as 401(k) eligible compensation)? Is it included in comp for other benefits? Pension, life ins, etc?

[QDROphile]

Under most retirement plans, if the employee gets $650 and elects under the cafeteria plan to reduce pay by $650 to obtain health insurance, the $650 is still counted in compensation for the purpose of calculating retirement benefits. If the emloyee gets a $500 credit toward health insurance and reduces pay by $150 to cover the remainnder of the cost of obtaining health insurance, the retirement plan only recognizes $150 of compensation.

[GBurns]

I am still getting more details and some more actual pay stubs. The pay stubs seen so far makes it a wash as far as FICA is concerned, but this also seems coincidental based on the particular pay stubs already seen.

The "Benefits Credit" is not used in computing 401(k) comppensation etc nor OT. However, one of their labor people has now pointed out to them that the amount might be includable in base earnings for OT calculation, so they are now seeking legal advice.

Their Benefits enrollment form and SPD uses wording that actually states " This credit must be applied to a ...... benefit program, and can not be taken as cash." This wording, to me means that the amount should not be appearing as taxable income on the pay stub in this manner but should be treated as described by taxesquire.

I do not see anything wrong with how they are doing it, from a tax point of view, but I find it an unusual method and one fraught with potential problems whether it be OT or other calculations, or just difficult to change whenever needed as pointed out by masteff.

[Guest mjb]

The $500 is structured as an er contribution to a FSA which the employee can spend on benefits provided under the FAS but is not allowed to receive a cash distribution. It is not an ee contribution b/c the ee cannot elect to receive the $500 as cash. Some plans provide that unused funds are automatically contributed to a 401k plan as a default option. ER contributions are exempt from income and FICA withholding.

[GBurns]

That is what most of us are accustomed to, but in this case, the money (the Benefits Credit) does not go to the FSA but instead goes to the paycheck as taxable income.

How do I show them what he standard practice is? By the way, the way that it is being done was put in by one of the large CPA/Consulting firms, so there is a bit of Who are you to say that...? involved.

[masteff]

was put in by one of the large CPA/Consulting firms

I think half of us laughed to ourselves and thought "that explains the mess" when reading this.

[masteff]

Their Benefits enrollment form and SPD uses wording that actually states " This credit must be applied to a ...... benefit program, and can not be taken as cash."

I'd say your form and SPD are your best argument. You're operating in violation of them because it doesn't sound like you're policing if people are actually using the medical plan. Maybe you could pull a list of people who waived medical coverage and look to confirm that they got the credit on their paycheck. This would prove to management those people got the credit as cash, in violation of the plan.

[Guest mjb]

I am still getting more details and some more actual pay stubs. The pay stubs seen so far makes it a wash as far as FICA is concerned, but this also seems coincidental based on the particular pay stubs already seen.

The "Benefits Credit" is not used in computing 401(k) comppensation etc nor OT. However, one of their labor people has now pointed out to them that the amount might be includable in base earnings for OT

If the benefits credit cannot be taken as cash how is it taxable?

GB: I dont know what you mean by the pay stubs make it a wash for FICA. Either it is included or it is excluded. Short ans is to check w-2 for yr to see if contributions are included in comp or not.

Plan admin should be able to ans Q of whether funds are directly deposited into FSA account. But what I dont understand is why the plan is going though this convoluted procedure which creates tax Q instead of paying the $500 premium directly to the ins co (w/out any tax withholding) and having the ee contribute the $150 pre tax via a pop.

[Jacmo]

Since this methodology was recommended by a large national consulting firm, it may be their way of showing the employer how they can "enhance" the value of their health insurance to the employees. But I still say it's a dangerous misrepresentation of the facts.

[LRDG]

This sounds like "Total Compensation", which is a statement prepared for each EE, is comprehensive evaluation of all ER paid/provided benefits expressed as BENEFIT CREDITS. It can be EE directed or simply a statment of ER allocated 'credits'. Usually there is no change in ERs benefit package, is only a means of communicating itemized benefits and dollar value not included in a pay stub.