Frionge Benefit Or Not...

[austin3515]

Client has a Section 125 plan document that basically indicates basically this: You get a bonus of $1,000 a year if you opt out of employer paid health insurance benefits.

My position is that this compensation could be considered a fringe benefit as it is a component of the health insurance plan. It's all part of the health insurance fringe benefit.

I'm looking at our document and simply idnciates that "fringe benefits" are excluded (i.e., lower case f and b, with no elaboration on what that means...).

Is there a definition of fringe benefits out there that might be relied upon? Or does the fact that it is cash make it, by definition, NOT a fringe benefit.

What about a non-accountable car allowance that some companies pay to their salesman? I've always that was a fringe benefit.

[QDROphile]

In the context of a cafeteria plan I do not think that cash in lieu of nontaxable benefits will be a fringe benefit for regulatory purposes (e.g. safe harbor definition of compensation) but for plan design purposes the amount can be excluded from the definition of compensation that is used for calculationg benefits (subject to the discrimination rules). I can see your point, but I don't think it would be distinguished in the deep-rooted practices and understandings under section 125. Certainly the starting point of an auditor would be that the cash is not a fringe benefit. The car allowance analogy falls apart when it runs into section 125.

[austin3515]

do you agree tha the car allowance is a fringe benefit? The point of the analogy is to show that just b/c a beenfit is paid in cash, that doesn't automatically make it not a fringe benefit.

Plus, I must admit, since fringe benefits is such a common exlcusion from comp, it seemes that it ought to be documented very well somewhere whether or not common thisngs such as these fall into the defintion of fringe. The IRS has publication 15B which seems to cover a lot, but does not seem to be an exhaustive list of all the fringe benefits that might exist.

[QDROphile]

I would consider car allowance to be a fringe benefit. Cash payment is not the only consideration.

[austin3515]

But the key question is what are those considerations??

Just voicing my frustrations, that is all. I do appreciate your responses!!!

[QDROphile]

The cafeteria plan context has its own considerations that set it apart. Otherwise, I think fringe benefits can be a broad concept, and anything is a candidate when there is no correlation between the dollar value and services performed, such as you find with most welfare benefits.

[austin3515]

But doesn't opt out benefit fit into that? i.e., no correlation between lowest paid and higest paid employee, not dependent on job classification, etc.

TAG Gave me the following:

IRM 4.23.5.11 (11-03-2009)

Fringe Benefits

1. A fringe benefit is any cash, property, or service that an employee

receives in addition to regular taxable wages. IRC § 61 states that,

except as otherwise provided, gross income means all income from whatever

source derived, including but not limited to, compensation for services

including fees, commissions, fringe benefits, and similar items.

Consequently, a fringe benefit provided by an employer to an employee is

presumed to be income to the employee unless it is specifically excluded

from gross income by another section of the Code. See Treas. Regs. §

1.61-21(a).

2. Publication 15-B, Employer's Tax Guide to Fringe Benefits, may be used

for quick research on the treatment of certain fringe benefits. However,

the Code, regulations, revenue rulings, and court decisions are the

authority for any proposed issues.

3. The following non-exhaustive list provides examples of fringe

benefits:

Automobile allowances

Awards and prizes

Back pay awards

Bonuses

Cafeteria plans

Chauffeur services

Communications equipment (such as cell phones)

Company owned or leased aircraft

Company owned or leased vehicles

Country club memberships

Dependent care assistance programs

Disability payments

Discounts on property or services

Educational reimbursements

Executive dining rooms

Estate planning

Financial counseling

Free or subsidized lodging

Golden parachute payments

Group term life insurance

Home security systems

Income tax return preparation

Legal services

Loans (low interest or interest-free)

Low interest loans

Local transportation for commuting

Meals or meal money/allowances

Moving expense reimbursements

Outplacement services

Parking

Personal computers allowed to be used at home

Personal liability insurance

Physical examinations

Reimbursement of expenses on the sale of a personal residence

Safety awards

Severance pay

Scholarships and fellowships

Sick pay

Spousal travel

Stock options

Travel reimbursement

Use of vacation homes

Vacations (all expense paid or discounted)

　

IRM 4.23.5.11.1 (11-03-2009)

Statutory Exclusions from Gross Income

1. After a fringe benefit is identified, it is necessary to determine

whether there is a statutory provision that specifically excludes it from

gross income. The Code excludes the following fringe benefits from

income:

A. Employee achievement awards (IRC 74©)

B. Group-term life insurance (IRC 79)

C. Amounts received under accident or health plans (IRC 105)

D. Contributions by an employer to an accident or health plan (IRC

106)

E. Rental value of parsonages (IRC 107)

F. Certain combat pay of members of the armed forces (IRC 112)

G. Qualified tuition reduction (IRC 117(d))

H. Meals or lodging furnished for the convenience of the employer

(IRC 119)

I. Cafeteria plans (IRC 125)

J. Educational assistance program (IRC 127)

K. Dependent care assistance (IRC 129)

L. Certain fringe benefits (IRC 132)

M. Certain qualified military benefits (IRC 134)

　

IRM 4.23.5.11.2 (11-03-2009)

Fringe Benefits under IRC Section 132 and Definitions

1. IRC 132(a) provides that gross income shall not include any fringe

benefit that qualifies as one of the following:

A. No-additional-cost service,

B. Qualified employee discount,

C. Working condition fringe,

D. De minimis fringe,

E. Qualified transportation fringe,

F. Qualified moving expense reimbursement,

G. Qualified retirement planning services, or

H. Qualified military base realignment and closure fringe.

　

　

　

From (2009) IRS Publication No. 15-B, 1. Fringe Benefit Overview:

This section discusses the exclusion rules for the following fringe benefits.

Accident and health benefits.

Achievement awards.

Adoption assistance.

Athletic facilities.

De minimis (minimal) benefits.

Dependent care assistance.

Educational assistance.

Employee discounts.

Employee stock options.

Group-term life insurance coverage.

Health savings accounts (HSAs).

Lodging on your business premises.

Meals.

Moving expense reimbursements.

No-additional-cost services.

Retirement planning services.

Transportation (commuting) benefits.

Tuition reduction.

Working condition benefits.

　

§1.61-21. Taxation of fringe benefits

(a) Fringe benefits

(1) In general. —Section 61(a)(1) provides that, except as otherwise provided in subtitle A of the Internal Revenue Code of 1986, gross income includes compensation for services, including fees, commissions, fringe benefits, and similar items. For an outline of the regulations under this section relating to fringe benefits, see paragraph (a)(7) of this section.

Examples of fringe benefits include:

an employer-provided automobile,

a flight on an employer-provided aircraft, an employer-provided free or discounted commercial airline flight, an employer-provided vacation, an employer-provided discount on property or services, an employer-provided membership in a country club or other social club, and an employer-provided ticket to an entertainment or sporting event.

(2) Fringe benefits excluded from income. —To the extent that a particular fringe benefit is specifically excluded from gross income pursuant to another section of subtitle A of the Internal Revenue Code of 1986, that section shall govern the treatment of that fringe benefit. Thus, if the requirements of the governing section are satisfied, the fringe benefits may be excludable from gross income.

Examples of excludable fringe benefits include

qualified tuition reductions provided to an employee (section 117(d)); meals or lodging furnished to an employee for the convenience of the employer (section 119); benefits provided under a dependent care assistance program (section 129); and no-additional-cost services, qualified employee discounts, working condition fringes, and de minimis fringes (section 132).

[QDROphile]

You can certainly argue that section 125 only speaks to amounts that are taxable or not, and whether or not something is a fringe benefit does not depend on taxability. I just think that a section 125 arrangement is perceived as involving a choice between a nontaxable benefit and cash compensation. That perception may be wrong, but it is the one that you will probably be confronted with and have to disabuse.

[austin3515]

I think I've got it now!!

So, I'm an employee. My empoloyer pays 80% of my benefits if I elect to have health insurance. Let's focus just on the 20% part of the CODA. If I opt out of benefits, clearly the 20% increase in my paycheck is NOT a fringe benefit that would be xclued. So your position is that the additional income my employer gives me (in addition to simply not deducting the 20%) would also not be a fringe benefit. I think that is what your case is, correct?

Are you however in agreement that there is a fair amount of judgment involved? I think your logic regarding "Not based at all services performed" strongly suggests it would be a fringe benefit. Furthermore, the fact that this "benefit" is incorporated into the Sect 125 SPD (which is in and of itself a fringe benefit) further suggests this. What's more, the IRS IRM explicity says that a Cafeteria plan is a fringe benefit/.

Based on this last point, if it is a benefit provided under a cafeteria plan, I have to say I'm almost 100% convinced that opt out benefits fall into the fringe benefit column...

[masteff]

I think I've got it now!!

So, I'm an employee. My empoloyer pays 80% of my benefits if I elect to have health insurance. Let's focus just on the 20% part of the CODA. If I opt out of benefits, clearly the 20% increase in my paycheck is NOT a fringe benefit that would be xclued. So your position is that the additional income my employer gives me (in addition to simply not deducting the 20%) would also not be a fringe benefit. I think that is what your case is, correct?

Are you however in agreement that there is a fair amount of judgment involved? I think your logic regarding "Not based at all services performed" strongly suggests it would be a fringe benefit. Furthermore, the fact that this "benefit" is incorporated into the Sect 125 SPD (which is in and of itself a fringe benefit) further suggests this. What's more, the IRS IRM explicity says that a Cafeteria plan is a fringe benefit/.

Based on this last point, if it is a benefit provided under a cafeteria plan, I have to say I'm almost 100% convinced that opt out benefits fall into the fringe benefit column...

I see no if's and's or but's that this is a benefit being paid by the 125 plan and is therefore a fringe benefit. The $1000 is as much a CODA as the 20% premiums in your example. The employer is saying "here's a thousand bucks, you can take or have it used tax-free towards health insurance". A number of companies have cafeteria plans where they provide a balance of X dollars and the employee can choose between cash and one or more options. And the fact it's in the 125 SPD is a slam dunk.

[QDROphile]

austin 3515

You get it. Since the $1000 will show as W-2 compensation, the starting point for examination is that the $1000 is part of regular compensation, subject to a negative election of benefits. You may have to convince someone that the $1000 is intended by the employer as a health fringe benefit, subject to an election to receive cash. You also have marshalled your support for that argument.

[austin3515]

And the fact it's in the 125 SPD is a slam dunk.

I'm sorry masteff, but is that a slam dunk that it is a fringe benefit? Your first and last sentences seem to suggest that - but in the middle you lost me.

In your second sentence, you seem to argue that it's because it is the same as the 20% portion from my example, but to me, the 20% piece would NOT be a fringe benefit. I presume you agree, so perhaps you could clarify?

[masteff]

Sorry, yes, I meant, IMO, it has to be a fringe benefit.

The 20% and the $1000 are slightly different beasts, one is a salary reduction (my CCH benefits book calls it a "premium conversion approach") and the other is an employer-funded benefit under the 125 plan (what CCH calls a "full-flex approach"). I shouldn't have referred to it as a CODA so much as it's a 'cash option', which is an essential element of a 125 plan.

Looks like Google has a scan of the relevant pages of the CCH book (2004 version):

premium conversion: http://books.google.com/books?id=XNGtbaQzc...p;q&f=false

full-flex: http://books.google.com/books?id=XNGtbaQzc...p;q&f=false

(you might also glance at the "opt-up/opt-down approach" on the page before full-flex) (as far as I can tell, the 2007 regs didn't materially change either of these items)

We could state the pricing of the medical insurance inside the 125 plan as being $1000 plus 20% of the premium. The $1000 is employer-funded and the 20% is employee-funded.

My administrative interpretation would be that the $1000 is a "permitted taxable benefit" (term used in Temp Reg 1.125-1) paid out by the 125 plan and is a fringe benefit.