No-Cost Housing Provided to Retirees?

[Christine Roberts]

Private non-profit foundation in the senior housing business employs 9 individuals as property managers, 4 of whom are at or near retirement age. No formal retirement plan is in place, but active employees and one partially retired individual receive group health or Medigap coverage, no-cost housing and car (both needed for job), in addition to salaries.

Employer now wants to establish formal retirement arrangement. Presuming a Section 403(b) plan is established, or nonqualified annuities purchased, can employer continue to provide no-cost housing and/or car to retirees who no longer perform services for the Foundation?

[Guest Harry O]

No.

See IRC Sections 61, 119 and 132.

[mbozek]

An employer can provide for lodging of employees which is not subject to income taxation if it is on the business premises of the employer, it is furnished for the convenience of the employer (e.g., the employer needs to have employees on call on the premises 24/7) and the employee is required to accept lodging as a conditon of employment. IRS reg. 1.119-1(b). This benefit can be provided regardless of any other benefits provided by the employer. The use of automobiles for business purposes is also exempt from taxation but the personal use is subject to income taxation under very complex rules. These benefits can be provided for employees who perform services without regard to the number of hours performed. Employee can be retired for benefit purposes and provide services for the employer which will permit exclusion of housing and automobile. You should consult the IRS web site ( irs.gov) for the IRS publications which govern the taxation of these benefits. Even if benfits are taxed the maximum rate on taxable income is 10% of the first 7000 (14k for a married employee) and 15% on the excess up to 28k ( 56k for married employee). A married couple can exclude 16k in income (more if over 65).

[GBurns]

mbozek,

Do you think that it would work if a nominal amount of the income stream from the annuity was "directed" as payment for the housing and car?

Or, a nominal "consultant fee" equal to the cost of the housing and car was "paid" by the ex-employer, and which is directed to and usable only for the housing and car? This would be a "wash" to the exemployer.

[Guest Harry O]

No, this doesn't work. The original post said that the recipients no longer perform services for the employer. Any use of the housing or car is necessarily for personal reasons at that point. There is simply no exclusion from income for these items after termination of employment. It doesn't matter how they are paid for -- the ex-employee will be deemed to have received the annuity or consultant fee first and would be taxed on this amount. If this deemed payment is less than the FMV of the house or car, the excess is treated as additional taxable income.