Tax "gross up" on taxable fringe benefits

[Belgarath]

Suppose employer provides a fringe benefit which is taxable. Further suppose that the employer provides a "gross up" on the taxable fringe benefit.

Finally, let's suppose that this particular fringe benefit IS excluded for plan purposes, and that fringe benefit taxable amount is $1,000, and the "gross up" is an additional $250.

Is the "gross up" considered part of the taxable fringe benefit, and thus excluded for plan purposes? Or, is it considered separate, and therefore normal plan wages since not excluded?

[Peter Gulia]

I’ve never needed to apply a § 401(a) plan’s provisions on your question (because every gross-up I’ve seen has been for someone with compensation that, no matter how counted, would exceed the § 401(a)(17) limit).

But unless a Read-The-Fabulous-Document exercise points in a different direction, I might assume the gross-up amount is money wages (and not a part of the fringe benefit), and then apply the plan’s provisions following that finding. That wouldn’t completely answer your question because a plan might restrict or limit which payments of money wages count in compensation.

If the plan’s sponsor prefers excluding this gross-up from this employee’s (or some similarly situated employees’) compensation, consider that the Treasury department’s rule to interpret and implement Internal Revenue Code § 414(s) favors exclusions that lower the compensation of a highly-compensated employee. See, for example, 26 C.F.R. § 1.414(s)-1(c)(5) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR686e4ad80b3ad70/section-1.414(s)-1#p-1.414(s)-1(c)(5), § 1.414(s)-1(d)(3)(ii)(B) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR686e4ad80b3ad70/section-1.414(s)-1#p-1.414(s)-1(d)(3)(ii)(B).

[Belgarath]

Thanks Peter. In this case, the document is clear enough - if the gross up isn't considered part of the taxable fringe benefit, then it is "normal" w-2 comp, and it is NOT excluded. We're deferring to the CPA on this question anyway, but I've never had to consider this specific issue. The plan sponsor doesn't have any particular desire to exclude this payment - just wants to determine what approach is correct. So it sounds like you lean toward it NOT "attaching" to the actual fringe benefit?

Thanks again.

[Peter Gulia]

Yes, absent a plan provision otherwise, one might assume the gross-up amount is money wages (and not a part of the fringe benefit).

Even if the plan’s administrator will take advice from another practitioner, consider reminding your client that a finding should not treat highly-compensated employees more favorably than similarly situated (if any) non-highly-compensated employees. And beyond Internal Revenue Code §§ 401-414, an employer/administrator might consider whether its finding would be fair regarding similar gross-ups, and perhaps other kinds of gross-ups.

Further, the employer might evaluate whether anything about the gross-up or a treatment of it violates the employer’s provisions for, or a desired tax treatment of, the fringe benefit, including as it applies regarding other employees.