Taxable fringe benefit - "nonaccountable" plan

[Belgarath]

This seems like a ridiculous question. However, I'm suffering from pre-holiday brain cramp...

Suppose your plan defines comp as W-2. Further suppose that the employer buys shoes for its factory workers, and, I don't know, maybe something like gym memberships. The employees don't have the option to receive this money in cash, but it is still taxable compensation, and included on the W-2 because it is a "nonaccountable" plan according to the employer's CPA. I proffer no opinion as to whether that is correct or not - I'm assuming it is correct for purposes of this question.

From a practical viewpoint, how would this be handled when calculating the deferral amount to come out of the employee's paycheck? I assume this is really a payroll/employer problem. For example, base pay that would otherwise be paid to the employee for the year is $10,000, and employee defers 5%. But, there is TAXABLE fringe benefit of another $1,000, and the employee's W-2 is going to show $11,000. Does the employer/payroll company, at some point, have to withhold another $50 from the employee's paycheck? Or, since the employee could never have elected to receive this compensation in cash, is it simply ignored for deferral purposes?

[Bill Presson]

We actually have the same issue with our own plan and I'm betting almost every company of any size does whether they realize it or not.

When we have drawings at firm meetings or award gift cards etc., those amounts are required to be put on the employee's W-2. But there is no way for there to be any withholding. So our attorney has said while it is taxable compensation and it is eligible for employer contribution allocation, there is no requirement for a deferral because there was no possibility of deferral. It is similar to imputed income from life insurance in excess of $50,000, etc.

We've had the plan audited by the IRS a few years ago and they concurred.

[Belgarath]

Thanks Bill. Nice to see that common sense prevails sometimes!

[Guest ppapdx]

I think there are plenty of people who would disagree and opine that an extra $50 would need to be deducted. See the bottom of page 4 from this ASPPA 2010 annual conference publication on compensation. It states that when it comes to the value of taxable fringe benefits, then you take the withholding from other compensation. And an IRS response on page 6 says the following:

The Service representative disagrees with the proposed response. The proposed answer cites to the Section 401(k) regulations which provide that elective deferrals may only be made from cash. The Service representative indicated that there is a distinction between the compensation to which a deferral election is applied and the compensation from which the elective deferrals actually come out. Because the value of group term life insurance is included in compensation, it must be taken into account in applying the employee’s deferral election. For example, if an employee elects
to defer 10% of compensation and the employee has $45,000 of cash compensation and $5,000 of taxable group term life insurance, then $5,000 must be deferred into the plan. Since the $5,000 deferral amount cannot be taken from the imputed income from the group term life insurance, the elective deferrals must be taken from cash compensation. The group term life insurance cannot be disregarded for purposes of determining the amount of an employee’s
compensation unless the plan was specifically drafted to provide that the group term life insurance is excluded from the plan’s definition of compensation.

[Bill Presson]

ppapdx,

Thanks for the info. What a great example of a stupid answer from the IRS.

Wish we had this conversation prior to the BCOS earlier this month because I would have liked to see Monika Templeman defend this position.

[401king]

We ran into this issue with several audited plans for the 2011 plan year. The auditors found the exact issue with group term life insurance (probably not coincidental). The plans then had to make a QNEC for 50% of the missed deferral amounts. ppadx's post sure explains why all these auditors finally noticed it in the year following the IRS response. Just another policy instituted with no thought of how to implement it.

[Belgarath]

Humph!! Well, thanks for the information. I'm actually not surprised...

[Bill Presson]

Now might be a good time to stand up to them and tell them to stop targeting these kind of plans.

[QDROphile]

What kind of plans are you talking about? This issue can be dealt with by an understanding of the rules and appropriate plan terms and communications to participants. Those elements are missing from the mass produced documents and asset based marketing practices that prevail today. You might better argue that the rules should be changed to accommodate the market realities. The potential abuses pale by comparison to what is now passes for legitimate plan design, so removing the complexities would not do great harm.

[Bill Presson]

What kind of plans are you talking about? This issue can be dealt with by an understanding of the rules and appropriate plan terms and communications to participants. Those elements are missing from the mass produced documents and asset based marketing practices that prevail today. You might better argue that the rules should be changed to accommodate the market realities. The potential abuses pale by comparison to what is now passes for legitimate plan design, so removing the complexities would not do great harm.

Sorry. My humor was way too veiled. Trying to tie in the targeting issue going on with the EO side.

[GBurns]

Bill, How will you check your lines and emails?

[Bill Presson]

Bill, How will you check your lines and emails?

I've never been able to successfully use screen names so I'll just have to take my chances.

[K2retire]

On 5/24/2013 at 10:33 AM, Guest ppapdx said:

I think there are plenty of people who would disagree and opine that an extra $50 would need to be deducted. See the bottom of page 4 from this ASPPA 2010 annual conference publication on compensation. It states that when it comes to the value of taxable fringe benefits, then you take the withholding from other compensation. And an IRS response on page 6 says the following:

The Service representative disagrees with the proposed response. The proposed answer cites to the Section 401(k) regulations which provide that elective deferrals may only be made from cash. The Service representative indicated that there is a distinction between the compensation to which a deferral election is applied and the compensation from which the elective deferrals actually come out. Because the value of group term life insurance is included in compensation, it must be taken into account in applying the employee’s deferral election. For example, if an employee elects
to defer 10% of compensation and the employee has $45,000 of cash compensation and $5,000 of taxable group term life insurance, then $5,000 must be deferred into the plan. Since the $5,000 deferral amount cannot be taken from the imputed income from the group term life insurance, the elective deferrals must be taken from cash compensation. The group term life insurance cannot be disregarded for purposes of determining the amount of an employee’s
compensation unless the plan was specifically drafted to provide that the group term life insurance is excluded from the plan’s definition of compensation.

We have a plan that recently paid QNECs of about $50,000 as part of a VCP filing because they had not previously been including the excess group term life in their calculations. Subsequently, the plan was amended to exclude fringe benefits from the definition of compensation.

Our document has a totally separate line to exclude excess group term life. I thought that was so that you could exclude only GTL without excluding other fringe benefits. One of my associates thought that meant that GTL is not a fringe benefit for purposes of that exclusion. 

Since there isn't a clear definition of "fringe benefits" from the IRS, how would you treat it?