Safe Harbor Taxable Fringe Benefit

[austin3515]

I personally would not consider a "length of service" bonus paid to be a taxable fringe benefit but I am encountering a plan where it was treated as a safe harbor comp exclusion taxable fringe benefit. To add a little more color, people who have been with the company 0-5 years to get nothing, between 5 and 10 get 1,000, between 10 and 15 get 2,000, etc. 

This is all the more important for this plan because it is a Safe Harbor Plan, and I'm tying to determine if the definition meets a 414s safe harbor definition of compensation.

I guess it falls squarely within a gray area, but in such cases I would lean towards the more conservative.  what do y'all think?

[duckthing]

It doesn't sound like a taxable fringe benefit to me. But it does sound like there's a good chance it would pass 414(s) ratio testing, depending on what the demographics look like.

[Bri]

Of course, if you've got an adoption agreement, there might be separate options to exclude bonuses AND exclude taxable fringe benefits.  Which would imply some attorney indicated (with IRS approval) they are indeed distinct items, no?

[austin3515]

Well I don;t think it is a bonus for sure.  And I suppose the argument for a fringe is that it is not compensation for services rendered, it is supplemental in nature.  Like I said I would prefer to treat it as not and consider a non-safe harbor exclusion and run the 414s test.  I know th eplan has not historically treated it that way, hence the question...

[duckthing]

Maybe I'm missing a detail here, but have you run the test already? If it passes, you're all set regardless of how it's classified -- either it's a taxable fringe benefit and excluding it doesn't cause your definition to fail to be a 414(s) safe harbor definition, or it's not a taxable fringe benefit but the CRT passed so your definition seems to satisfy the requirements of 1.414(s)-1(d). Of course if the test fails you're back to the original question, but I don't know that I'd spend a ton of time trying to classify it unless you have already determined you can't pass the test.

[austin3515]

Let me clarify.  First of all, I'm well versed in the rules here

This is not a client yet.  They have histroically taken the position that it is a taxable fringe benefit and have not run the CRT.  I'm trying to impress them and point out a problem, but I'm thinking perhaps it is a gray area.  The amount of the benefit is not significant, so I'm presuming it will pass just fine, especially since I'm betting the HCE's are disproporationately getting the bigger benefits (people making more tend stay put).

So it's not a question of how to handle a non-safe harbor definition of comp.  The question is, does this represent a non-safe harbor definition of comp that requires testing.

[Luke Bailey]

austin3515, I had to research this for a client once. Adoption agreement had a box to check to exclude "taxable fringe benefits" from comp for purposes of allocations, and noted that if box was checked 414(s) ratio test needed to be run. 414(s) ratio test was run and passed. Research concluded there was no Code or reg definition of "fringe benefits." Rather, "fringe benefits" is a business term. (Of course, Section 132 fringe benefits that qualify for exclusion from income are just a subset of all "fringe benefits"). IRS publications tend to be expansive on what is a fringe benefit, because the point is that they are taxable under Section 61 unless some exclusion applies. Bottom line, almost anything other than regular pay can arguably be considered by the employer as a "fringe benefit" in interpreting its plan language, if language ambiguous. And there is good case law regarding the employer's interpretive authority over the issue.

[austin3515]

3 minutes ago, Luke Bailey said:

and noted that if box was checked 414(s) ratio test needed to be run

While I was very grateful for the rest of your post I am puzzled by this statement, since it is a safe harbor exclusion?  I would not run the CRT if the only exclusion was taxable fringe benefits.

[Luke Bailey]

18 hours ago, austin3515 said:

While I was very grateful for the rest of your post I am puzzled by this statement, since it is a safe harbor exclusion?  I would not run the CRT if the only exclusion was taxable fringe benefits.

austin3515, you are right that cash and noncash fringe benefits is listed as a permissible exclusion in 1.414(s)-1(c)(3). I was addressing the plan document issue, i.e. whether, if the plan document in some form says you don't include taxable "fringe benefits" in compensation, an employer that consistently and in good faith has treated the bonus you described as an excluded fringe benefit could exclude it. However, because I think it is a stretch to say that this is what the IRS had in mind when it wrote the reg, and because it would have a potential for systematic discrimination if the persons who got the bonus were disproportionately highly compensated, if the amount is significant I would backstop the analysis with the (d)(3) test. The plan document you are dealing with may or may not permit this analysis. I would guess that the group that gets the length of service bonus is not disproportionately highly comped, but that is just a guess.