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FINANCIALLY SPEAKING Best Individual Taxpayer Victories of 2001 (Mar/Apr-02)
FINANCIALLY SPEAKING Overlooked Charitable Contributions (Jan/Feb-02)
FINANCIALLY SPEAKING Paperwork Mistakes That You Must Straighten Out Before Filing Your Income Taxes (Nov/Dec-01)
The Seven Deadly Sins of Running a Business (Sep/Oct-01)
Five Tools For Cutting College Tuition Costs (Jul/Aug-01)
Now That You’ve Got All The Numbers … What do They Mean? (May/Jun-01)
Ten Timely Tax Tips (Jan/Feb-01)
Pros and Cons of Revocable Living Trusts (Nov/Dec-00)
Thinking About Improving Your Company? (Sep/Oct-00)
Employee Benefits (Jul/Aug-00)
Have You Thought About the Future? (May/Jun-00)
Taxes (Jan/Feb-00)
(Nov/Dec-99)
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FINANCIALLY $PEAKING: Employee Benefits

Every company's workforce is unique. Some have proportionally more married employees, others have more older workers. Other employees are caring for elderly parents and relatives.

Workforce diversity is a fact of life. No one benefit plan can be all things to all people. The challenge is to devise a plan that is cost-effective and flexible and one that at least attempts to "have something for everyone."

The tax law encourages employers to offer certain types of benefits. Employees may receive these benefits fully or partially tax free. Employers can deduct some or all of the cost of benefits. In some cases employers save on employment taxes. Traditional benefit plans and tax aspects from both the employer and employee perspectives.

Adoption assistance: The cost is deductible by the employer. The benefit is tax free up to $5,000 ($6,000 for a child with special needs) if the employee's Adjusted Gross Income (AGI) is below a threshold amount. While the benefit isn't subject to income tax withholding, it is still subject to FICA and FUTA taxes.

Dependent-care assistance: The cost is deductible by the employer. The benefit is tax free up to $5,000. The excludable benefit is not subject to income tax withholding, FICA and FUTA taxes.

Education assistance: The cost is deductible by the employer. Undergraduate courses provided under an education assistance program are tax free up to $5,250. Where courses are job-related, they're fully tax free (even graduate-level courses). The excludable benefit is not subject to income tax withholding, FICA and FUTA taxes.

Group-term life insurance: The premium is fully deductible by the employer. The first $50,000 are tax free where coverage is nondiscriminatory. Excess coverage is taxable under an IRS age based table. The excess amount is subject to FICA tax, but not to income tax withholding or FUTA tax.

Health coverage: The premium is fully deductible by the employer. Benefits are tax free to the employee and the employee's dependents. However, employees are taxed on benefits provided to domestic partners (they're not considered spouses by law).

Incentive Stock Options: The corporation cannot deduct these options. But employees don't realize income when the options are granted nor when they're exercised (although there may be an Alternative Minimum Tax cost upon exercise). Employees realize long-term capital gain when they sell stock acquired by an option if the sale is at least two years after the option was granted and at least one year after it was exercised.

Interest Free Loan: The employer is taxed on the interest not charged (but can treat this amount as deductible compensation). The employee is taxed on the interest not charged as additional compensation. The additional compensation is subject to FICA and FUTA taxes but not to income tax withholding.

Investment counseling: The employer can deduct the cost. The employee is taxed on the benefit, but may be entitled to a miscellaneous itemized deduction for this "investment expense."

Moving Expenses: The employer can deduct the cost. The employee is not taxed on this benefit if he/she would have been entitled to a deduction had the employee paid the expense.

Pension/profit-sharing plans: The employer can deduct contributions within certain IRS limits. From the employee perspective, contributions are excludable from income while benefits are taxable.

Transportation benefits: The employer can deduct the cost. In 2000, the employee can exclude up to $175 of free parking per month and up to $65 per month for a van commuting or transit passes.

Cafeteria plans and FSAs

Employers can let employees choose the benefits they most desire by using cafeteria plans and flexible spending accounts (FSAs). Cafeteria plans let employees choose from a benefits menu ( there must be at least one taxable and one nontaxable benefit on the menu). FSAs let employees pay for health care or dependent care on a pretax basis. Employees agree to salary reductions that are then used to buy benefits under the FSA. The options provide saving to employers who otherwise might pay for benefits that are not utilized by their employees. Benefits covering through an FSA are subject to IRS regulations.

Example: A married employee has health coverage through a spouses employer. This employee might opt to forgo the choice of health coverage under a cafeteria plan.

Most benefits provided under a cafeteria plan are exempt from income tax withholding, FICA, and FUTA taxes. However if an employee selects cash in lieu of benefits, the cash is treated as additional compensation subject to these employment taxes.

Nontraditional benefits

In recent years, there has been increased emphasis on providing benefits for workers with children. Employers can offer benefits that have a minimal direct cost but are highly valued by employees.

Flextime (working a full schedule at hours and days selected on an individual basis).

Telecommuting working entirely or partially from home).

Job sharing (two employees sharing one full-time position).

Employees opting for these alternative work arrangements can schedule their time around their personal responsibilities.

Bonus: These benefits may actually save the employer money by increasing morale and reducing absenteeism and turnover. They can also improve an organizations ability to recruit new employees, essential in today's tight labor market.

For more information, click on the Authors Biography at the top of this page.

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