Compensation- Cash Value of Employee Gift Card

[Brigid]

If a Plan uses the definition of pay that is W2 compensation subject to income tax at the source (code section 3401(a)), and the Plan further has no pay exclusions of any type and the basic document does not automatically exclude any types of pay from the definition of compensation, if the employee is given a gift card with a value of $500 that the Employer has to report the cash value of the gift card on the employee’s W2 for the employee to pay income tax on when the employee files his/her tax return at year-end, is the employee eligible to salary defer on this journal entry to the payroll system?

 This is a taxable fringe benefit that is added-on/provided to the payroll provider at year end for W2 reporting purposes for the employee.

 Does the answer above change if the Plan uses a definition of pay that is based on code section 6041/6051 (which is income reportable on Form W2)?

 I believe the answer is NO using 3401a compensation and YES using 6041 compensation.

 This tends to happen with other taxable fringes that are yearend add backs to the payroll system for purposes of getting onto an employee’s W2.  S-Corp Health Insurance and Personal Use of Company Car as two other examples.

 Thank you.

[CuseFan]

I agree, if you are not required to withhold taxes at the source (which you can't because it's not cash) - GTL is another item that is not included in 3401(a) definition but is included in W2 reportable (6041/6051) definition - then it's not 3401(a) wages.

[jpod]

If it is not an excludable fringe benefit, what is the authority that says "you are not required to withhold taxes at the source"?

[Brigid]

The authority is coming from the definition of compensation used.  The fact that 3401a is the definition of compensation for the plan, it means that unless you can run the gift card through for payroll processing, which you can't as it is a gift card, then you can't withhold at the source which means you can't set up payroll deductions for 401k, for insurance, for taxes, etc.   The only option is to "add it on" to the year end payroll report as an adjustment at it face value of $500 for the employee to pay taxes on.

The question was can they deferring on it as it is added back to payroll, and that answer is NO.

But for the denominator purposes of determining testing compensation, since fringe benefits are not excluded from the base definition of compensation, the cash value of the gift card is in my compensation figure reported for plan testing.  The individual just could not defer on it so if he/she was at 5% 401k amount, at year end, they will be slightly less than that because testing compensation will now include the $500 gift card.

[jpod]

I am not entirely sure what you mean by "run the gift card through payroll processing."  Regardless of what you mean, taxes (income and FICA/Medicare) must be withheld on all taxable compensation, even non-cash compensation.  There are a few exceptions, but I am pretty certain there isn't one that would apply to a taxable gift card.  Will the employer get the electric chair for not withholding?  Probably not, but if the requirement to withhold is relevant to whether the comp gets counted for plan purposes then you need to take the withholding requirement into account whether or not the employer actually withheld.

[Luke Bailey]

Agree with jpod. This is covered on page 29 of IRS Pub 15-B. With only a couple of exceptions (deemed premium for Section 79 life insurance in excess of $50k being the only one I can remember), taxable fringe benefits are subject to FITW as well as Box 1 W-2 reporting. The break they give you is that you can treat as paid at a more convenient time after the fringe is provided, e.g. end of year, and also in some cases use supplemental withholding rules. Again, covered in Pub 15-B. Still subject to withholding under 3401(a), however.

[TMH]

Not sure I agree with this as I had back owner health insurance and taxes are not required.  They flow to my W2 but no taxes are withheld at the source meaning as payroll is processed.

[TMH]

Also, the question is 401k salary deferral required on the add-back.   My answer is no because the definition of pay is 3401a.    That is what we are really trying to confirm.

[TMH]

I have confirmed this client did gross up to cover applicable taxes to net a check of $0.  But the question is was 401k withholding required on this check.  I believe that answer is no because the plan's defintion of pay is 3401a.  Comments?

[jpod]

TMH, please clarify what you are asking here.  Who are you in relation to the employer and be more precise please with respect to your question(s).  thanks. 

[TMH]

I have been trying to find clarification that the add back of the cash value of the gift card to the employee's payroll needed to also have a 401k salary deferral amount deducted from it.

The ER grossed up the $500 value to cover taxes and then showed a deduction of $500 in a category called "gift card" to net the employee a $0 paycheck.  The ER is asking should they have also accounted for his 401k salary deferral contribution amount and included that as well.

Since the plan uses the definition of pay of 3401a and the plan has no exclusions of compensation, I may be just overthinking this and the answer is yes, the ER should have grossed up to cover the 401k deduction because the plan does not exclude anything and this gift was subject to taxes at the source.

If the plan excluded the fringe benefit, then the answer is no.

But I have sent this issue to Rich Hochman as this plan is on the McKay Hochman document for now.

Thank you.   

 

[TMH]

Per Rich Hochman.   Yes, the cash value of the gift card should have had a salary deferral made from it as this form of pay was not excluded within the plan document.  it is also not a "fringe benefit" and therefore would be subject to 414s testing.