Employers are obligated to withhold Federal Income and Federal
Insurance Contributions Act (FICA) taxes on wages, and may satisfy
this obligation by actually withholding from the wage payments,
withholding from other wages paid to the employee, or accepting a
check from the employee for the withholding obligation. Failure to
withhold can result in the employer becoming liable for the
non-withheld taxes. Beginning in 2015, the penalties for errors or
omissions for information returns have dramatically increased and
can be as high as $500 per copy of return. See our
previous
On the Subject for more information.
FICA Tax Withholding on Non-Qualified Deferred
Compensation
Prior to January 1, 2016, employers should withhold on any amounts
earned by an employee under a non-qualified deferred compensation
plan (NQDC), which becomes vested and ascertainable in 2015. In the
case of a NQDC arrangements, the FICA tax, comprised of Social
Security and Medicare taxes, can apply when NQDC plan amounts are
no longer subject to a substantial risk of forfeiture and are
ascertainable, meaning that the amount can be calculated
accurately. This special FICA timing rule for NQDC results in
imposing a FICA tax before plan benefits are paid.
Because FICA tax is generally withheld when wages are paid,
employers must pay careful attention to the special timing rule
that applies for FICA tax withholding on NQDC amounts. A painful
reminder of the rule is this year's decision in Davidson v.
Henkel Corp. In Henkel, a class of retiree
participants in a NQDC plan claimed that the payout of vested
benefits were reduced because Henkel Corp. had not withheld NQDC
amounts in accordance with the special timing rule which would have
reduced the total amount of FICA tax liability. The court agreed,
finding that the failure to withhold FICA taxes under the special
timing rule was both a violation of the implied terms of an NQDC
plan, as well as a violation of the Employee Retirement Income
Security Act of 1974 (ERISA).
Henkel Corp. makes clear that failures related to the
special FICA timing rule for NQDC amounts can result in serious
consequences. Unless employers withhold prior to year-end for any
NQDC amounts that became subject to FICA tax in 2015, they could be
penalized in both the form of additional amounts of FICA tax, owed
by both the employer and employee, as well as liability under
ERISA.
Employers are advised to check accruals under their NQDC plans and
withhold from any NQDC which has become vested and ascertainable at
any time in 2015. Note that the employer would first look to
withholding from either the deferred compensation balance or other
wages paid this year. The employer may need to seek a check from
the employee if the amount withheld is not sufficient to satisfy
FICA tax liability.
Impute Income and Withholding from Taxable Fringe
Benefits
December 31, 2015, marks the deadline for determining the proper
value of any taxable fringe benefits enjoyed during 2015. The
Internal Revenue Service (IRS) requires the value of fringe
benefits to be imputed in income when not specifically excluded
under a provision of the Internal Revenue Code (Code). Taxable
fringe benefits include, but are not limited to, the fair market
value of the personal use of a company-provided automobile; taxable
meals; season tickets to sporting events; personal travel on
company aircraft; taxable spousal travel; prizes; and awards.
The IRS allows an employer to impute income for taxable fringe
benefits on a periodic basis, as infrequently as once per year,
rather than when the taxable fringe benefit is actually provided.
In addition, employers can adopt a cut-off date as early as
November 1 for gathering information to report the value of imputed
income for taxable fringe benefits in 2015 for benefits provided in
the last 12 months. See Announcement 85-113.
Cafeteria Plan "Use It or Lose It" Deadline
Unless an employer adopts a grace period provision, the "use
it or lose it" deadline for "Cafeteria Plans" is
December 31. Section 125 of the Code "Cafeteria Plans"
allow employees to direct wages on a tax-free basis for the payment
of medical bills and other health benefits. These contributions
save both income tax for the employee and FICA for the employee and
employer. The catch is the notorious "use it or lose it"
rule. Employees must decide at the beginning of the year how much
to contribute to the plan. Generally if the amount contributed is
not used by December 31, the excess is forfeited.
A popular exception to the December 31 deadline is the availability
of a "grace period" provision. This provision extends the
deadline until as late as March 15, 2016. This allows expenditures
up through March 15, 2016, to be used against amounts contributed
in 2015.
If employers do not adopt the grace period provision to accommodate
employees, employees will need to do the traditional last-minute
trip to the drug store, dentist or optometrist to use up the funds
in their accounts for medical benefits. Employers may wish to
remind their employees of this deadline so as to avoid the any
unexpected forfeitures of employee contributions or alternatively
may wish to adopt a grace period to accommodate delays.
New Form W-4 to Increase Withholding
Employers withhold federal income tax in accordance with the Form
W-4 provided by each employee. Withholding from wages pursuant to
the Form W-4 is considered to have been paid ratably throughout the
year. In contrast, estimated tax payments made with respect to
non-wage income is credited only when paid and may result in
penalties for each quarter's underpayment. Employees are
permitted to file a new Form W-4 at any time during the year to
increase or decrease the amounts withheld from periodic wages and
bonuses. An employee, including a highly paid executive, may wish
to increase withholdings on the last remuneration paid in 2015 in
order to avoid interest and penalties related to underpayment
penalties from income outside of employment or with respect to
under-withheld additional Medicare tax.
As a complication for some executives who wish to avoid
understatement penalties by increasing withholding on wages, there
are special rules regarding supplemental payments (e.g.
bonuses) of more than $1,000,000, which require withholding at
exactly 39.6 percent. This means that any shortfalls in withholding
cannot be "made up" by withholding from such supplemental
payments so that the withholding is more than 39.6 percent. In such
cases, any increased withholding may only be made from regular
wages and can be made generally up to 100 percent of the regular
wages.
Additional Medicare Tax
All wages that are subject to the regular Medicare tax rate of 1.45
percent are also subject to additional Medicare tax withholding if
paid on wages in excess of $200,000. Under the Affordable Care Act
(ACA), effective January 1, 2013, employers must withhold 0.9
percent as additional Medicare tax for every employee whose
earnings reach $200,000 in the calendar year. Employers are
required to begin withholding additional Medicare tax in the pay
period in which employee wages reach $200,000 and continue to
withhold it each pay period until the end of the calendar year.
Additional Medicare tax is only imposed on the employee; there is
no employer share of additional Medicare tax. The requirement to
withhold on amounts above $200,000 may not be altered due to the
marital status of the individual, which may result in more or less
ultimate liability for the tax by the employee when the
individual's tax return is filed. Employees who anticipate
having too little additional Medicare tax withheld may wish to
complete a new Form W-4 and submit it to their employers before the
company's final pay period to have additional regular wages
withheld. For more information about the additional Medicare tax
withholding obligations by employers, see the IRS' website.
Same-Sex Marriage Equality
In the second of two landmark decisions on same-sex marriage, the
Supreme Court of the United States ruled on June 26, 2015, that the
Fourteenth Amendment requires all states to license marriage
between two people of the same sex, and recognize same-sex
marriages lawfully licensed and performed in another state.
(Obergefell v. US, No. 14–556, June 26, 2015.)
Employers, especially those in states where same-sex marriage was
not previously legal, should review their payroll procedures with
respect to taxation of same-sex partner benefits to ensure the
proper federal and state tax treatment of benefits extended to
same-sex spouses and consider how to communicate these changes to
employees.
One significant change affecting many employees, and that may be
retroactive, is the state and local taxability of same-sex spousal
benefits. Employers will no longer need to apply special taxation
rules to same-sex spouses based on the myriad of state tax laws,
for example, those employers who were previously offering tax
gross-ups in the form of increased compensation to provide equal
treatment to employees who were taxed under state or federal law on
the value of employer-provided coverage for a same-sex spouse or
partner.
Now, all same-sex spouses will receive favorable state tax
treatment. This only applies to married same-sex couples.
Therefore, it should be noted that federal law, even
post-Obergefell, will not apply the same favorable tax
treatment to coverage provided for a non-dependent partner in a
same sex domestic partnership or civil union.
Read more about same-sex and partner benefits
here and
here.
Transit Benefits
In Rev. Proc. 2014-61, the IRS provides that employers' transit
benefit programs may allow employees to receive a maximum allowed
pre-tax parking benefit for 2015 of $250 per month and a maximum
allowed pre-tax mass transit benefit for 2015 of $130 per
month.
Employers should be mindful of the potential for a year-end
retroactive increase in the amount of allowable monthly limits for
mass transit benefits. Congress has done this before. In 2013, the
American Taxpayer Relief Act retroactively increased the 2012
monthly transit benefit exclusion from $125 per month to $240 per
month. This gave transit benefit parity with the parking benefit
for 2012, which was $240. For many employers, this retroactive
increase resulted in both decreased FICA and federal income tax
liability.
If U.S. Congress passes retroactive parity measures, employers
should be poised to react and amend Form W-2 accordingly. For more
information about pre-tax transportation benefits as well as the
2013 retroactive increase in transit benefits, view our previous On the Subject.
Affordable Care Act Reporting
Employers of all sizes will be subject to the imposition of annual
reporting requirements under the ACA. The IRS will use the
information reported by employers and insurers under the reporting
requirements of the ACA to both determine individual eligibility
for premium tax credits as well as to determine individual
compliance with the individual shared responsibility requirements.
The first report is due in 2016 for 2015 coverage.
There are two types of reporting requirements: (1) reporting of
minimum essential coverage and (2) applicable large employer (ALE)
reporting on health insurance coverage offered under employer
sponsored plans.
Annual reports of minimum essential coverage must be filed on IRS
Form 1095-B and transmitted on Form 1094-B. Insurers; employers
that sponsor self-insured group health plans; and those who provide
minimum essential health insurance coverage are all required to
file these reports. Employers that sponsor self-insured group
health plans must report information about employees (and their
spouses and dependents) if the employees enroll in the coverage.
This is the case even if the employer is not an ALE subject to the
employer shared responsibility provisions of the ACA. The 1095-B
solicits information about the entity as well as specific
information for each individual for whom minimum essential coverage
is required.
ALE reporting must be filed on IRS Form 1095-C and transmitted on
Form 1094-C. An ALE, generally defined as an employer with 50 (100
for 2015) or more full-time employees, is subject to the
employer-shared responsibility provisions of the ACA. An ALE must
describe the kind of health care coverage—whether health
insurance or self-insured health care coverage—that it
provides to its employees; provide a list of full-time employees;
and detail both the coverage offered to each employee and the
months to which the coverage applied. An ALE is also required to
give each full-time employee a copy of the Form 1095-C that is
filed with the IRS. By February 1, 2015, statements must be
furnished to employees on paper by mail or hand-delivery, unless
the recipient affirmatively consents to receive the statement in an
electronic format.
An ALE with 250 or more information returns during the calendar
year, must file the Form 1095-C and 1094-C electronically.
Electronic returns must be filed through the ACA Information
Returns Program: AIR. For more information about the filing of ACA
returns, see our previous
On the Subject. Employers should be aware that these
returns are included in the category of information returns for
which the new higher rate of penalties incorrect or missing
information returns apply.
Employers Need 2015 Year-End Planning to Meet Employee Reporting and Withholding Requirements
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