Car Allownces

[katie58]

Should car allowances be included in the definition of compensation?

The doc only says that a bonus and items included in Treasury reg. 1.414(s) 1©(3) should be excluded.

I could not really find a car allowance definition.

Would it be based on whether or not the car allowances is included in W-2 income?

Thanks!

[masteff]

"(3) Safe harbor alternative definition. Under the safe harbor alternative definition in this paragraph ©(3), compensation is compensation as defined in paragraph ©(2) of this section, reduced by all of the following items (even if includible in gross income): reimbursements or other expense allowances, fringe benefits (cash and noncash), moving expenses, deferred compensation, and welfare benefits."

My opinion is that a car allowance would fall under either "other expense allowances" or "fringe benefits".

It's not based on being included in W-2 income because of the words "even if includible in gross income".

[austin3515]

I agree taxable fringe benefit/expense allowance for sure, so if you excluded those in your doc (which I believe is your reference to 414s above) then it should be excluded. FYI, the key here is that it is a car allowance under a non-accountable plan. That is $350 a month to cover all expenses without the need to submit mileage records, etc. If it was an accountable plan, and the employer is reimbursing the employee based on mileage logs (x cents per mile) then it would always be excluded because it is NOT income regardless of the definition chosen in your document.

[katie58]

Thanks for your speedy answers. It is a flat reimbursement. The employees do not need to submit mileage.

The doc does exclude fringe benefits. So based, on your answers, the car allowance should not be considered 401(k) compensation.

Unfortunately, they have been considered it compensation!

Thanks again!

[MoJo]

I would disagree with the others. If it is a "flat dollar amount" not dependent on documentation, I believe it is includible (and took EXACTLY that issue to VCP a few years back). If I can find my research, I'll provide a cite - but the bottom line is, if you provide an "allowance: NOT based on actual expenses - it becomes part of comp for plan purposes. Of course, the plan could exclude such comp for certain purposes, if it so provides. The case I dealt with provided each "professional" with a $400 per month allowance (they travelled among various locations to provide services) and the issue for the VCP filing was the "missed opportunity" of not having deferrals taken from that allowance.

[austin3515]

In what way would a car allowance not be considered part of the term "other expense allowances"?

See IRM 4.23.5.12 (11-03-2009).

http://www.irs.gov/irm/part4/irm_04-023-005r-cont01.html

It specifically lists Auto Allowances on the list of taxable fringe benefits. It's actually at the very top of the list which can only be because it is the most quintessential fringe benefit that there is! (or perhaps it is just alphabetical )

4.23.5.12 (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

[MoJo]

Look at Pub 15-B - and it describes the very specific conditions that must be met for transportation benefits to be included in the fringe benefit category. Simply giving an allowance without meeting the criteria does not make it a non-includible fringe.....

[austin3515]

I choose to look no further because my clients do NOT want to give contributions based on an auto allowance. That would after-all be a clear case of double dipping. For me, the IRM sited is quite enough. This is unequivocally an Auto Allowance. There's no need to get any fancier than that in my humble opinion.

[david rigby]

Good grief. Why not just amend the plan to make it clear (at least prospectively)?

[austin3515]

There is the question as to whether or not that definition would be a 414s safe harbor, for starters.

[MoJo]

Yea. Whatever. So, a doctors groups can agree to give each doctor $5,000 each month for a "auto allowance" and it's a fringe benefit? Give me a break Austin. The tax code doesn't work that way. The criteria are clear - and the simple thing to do is as david indicates is to ensure the plan is drafted correctly! It cost my client (who became my client because of this issue) about $18,000 is missed opportunity costs, and filing fees, and my fees. It cost the prior attorney and TPA and recordkeeper a client.

[austin3515]

I suppose if you reversed the argument and indicated that a visiting nurse was going to be paid $25,000 a year and a $25,000 car allowance and then exclude taxable fringe benefits (which I think includes the allowance) then clearly that would be ridiculous. I was not referring to sham auto allowance policies, but rather the real ones.

But it doesn't impact how much Uncle Sam gets - we're not suggesting that the allowance isn't taxable - it is taxable as wages, so I'm not sure how the rouse you've outlined benefits the practice?

And you haven't explained why the IRM I've sited has no value?

[MWeddell]

There is the question as to whether or not that definition would be a 414s safe harbor, for starters.

You could amend the plan to state:

Compensation is reduced by reimbursements or other expense allowances, fringe benefits (cash and non-cash), moving expenses, deferred compensation , and welfare benefits. For purposes of clarification, an "expense allowance" includes any allowances provided by the employer for specific purposes regardless of whether it would be included in gross income or whether the employees must document how the allowance was spent.

Seems to me that phrased this way (1) one is less likely to run into trouble for not following the plan document and (2) it still complies with 414(s).

[austin3515]

I see the point regarding making the document explicit. But the bigger issue is that excluding car allowances as a taxable fringe benefit is happening all across the country. So unless you agree that the standard 414s fringe exclusion covers this, your talking about putting this "special language" into every document.

[MoJo]

Read the IRM. It's application is limited to inclusion for employment taxation - and says nothing about "how" such a payment to an employee is calculated, or "becomes" a "fringe benefit" as an "automobile allowance." You need to look further to figure out what an auto allowance is, and when it can be deemed to be a fringe benefit. Suffice it to say that not all payments "called" auto allowances are "fringe benefits" - and that is my point. The publication indicates that only certain transportation expenses are "fringe benefits." Meet the criteria - and you're golden. Don't meet the criteria and I don't give a flying bat guano what you call it - for IRC purposes, it is NOT a fringe benefit.

You basically prove my point in your last post - saying that "I was not referring to sham auto allowance policies, but rather the real ones." Yea. And how do you think you differentiate between "sham" policies and "real" ones? I really doubt the IRS is going to take the employer's word for it.... There are CRITERIA that you MUST follow - and I can tell you for a fact - that simply giving a "blanket" flat dollar amount DOES NOT QUALIFY as a real policy for purposes of calling the payment a "fringe benefit." It must be related to actual use and be documented through mile logging and other means. If you give EVERYONE the same amount - it isn't a real fringe benefits - it's simply a pay raise - and it is COMP for plan purposes unless specifically excluded in the documents.

You do what you want - but my client's documents are clear on that.

[austin3515]

Am I all alone here? Is no one else of the opinion that the consensus is clear that a $400 a month auto allowance requiring no documentation is a taxable fringe benefit??

[MoJo]

It is taxable compensation - but not considered a "fringe benefit." For it to be a "fringe benefit" (taxable or otherwise), it must meet the criteria. Otherwise, it's just a pay raise.... I can call anything I want an "auto allowance" - that doesn't make it a "fringe benefit" for code purposes (or more importantly, plan purposes).

[jpod]

I don't see how it is a taxable fringe benefit when it more closely aligns with "other expense allowance." With that said, i think it is reasonable to treat a modest or even a generous car allowance as an "other expense allowance" for purposes of applying the definition of "compensation," provided that the employee does actually drive his car for work to some degree, If there is no driving required for work then I think it's just a rose by another name and not an "other expense allowance."

[MWeddell]

I don't think it is clear in either direction, assuming that the plan excludes expense allowances and fringe benefits. I would ask the plan administrator to use its Firestone discretion to interpret the plan provision and would suggest that the next time a discretionary amendment is otherwise needed, that the plan provision be clarified to match the client's operational practice.