5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
From Spencer's Benefits Reports: Two recent Internal Revenue Service information letters clarify that amounts paid directly to employees in lieu of health care coverage are wages for employment tax (Federal Insurance Contributions Act (FICA)) purposes.
The letters, released in March 2008, discuss FICA taxation of a settlement received by a former employee in lieu of health care coverage. Both letters conclude that even though contributions that an employer makes under a plan that provides sickness or accident disability benefits to employees generally are excepted from FICA tax withholding, cash payments that an employer makes directly to employees in lieu of such contributions are wages subject to FICA tax withholding.
According to the letters, a significant factor is “that the employee had complete control over the disposition of the funds he received in lieu of certain health and welfare benefits, and the payer of the funds had no legal or contractual obligation to, and did not, verify that the employees used the cash payments to purchase health and welfare benefits.”
The letters (2008-0001 and 2008-0006) note that IRC Secs. 3101 and 3111 impose FICA taxes on both the employer and the employee on“wages,” which include all remuneration for employment, subject to certain specified exceptions.
The law excludes from the definition of wages payments that an employer makes under a plan or system that provides sickness or accident disability benefits to employees and their dependents. However, amounts paid directly to employees in lieu of health care coverage are not subject to this exception.
According to the letters, economic recoveries of back pay arising out of an employment relationship are includible in income and subject to FICA tax withholding, even if the amounts recovered are paid in lieu of nontaxable fringe benefits. For example, Rev. Rul. 75-241, C.B. 1975-1, 316, describes an employee who was paid a cash amount in lieu of certain health and welfare benefits. The revenue ruling concluded that the payments were wages for FICA tax purposes because “the payments are attributable to service performed by the employees for their employer, although the employers paid the amounts in discharge of a requirement of a federal statute that minimum fringe benefits in the form of health and welfare benefits be provided.”
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