Medical Insurance Fringe Benefit - Part Time Employee

[JohnH]

A non-profit organization has one full-time employee and one part-time employee. There is a plan in place to provide medical insurance for the full-time employee but not the part-time employee, who has private insurance. The board wants to provide a subsidy to the part-time employee to help with their medical expenses and private insurance costs.

Off the top of my head, it seems that this subsidy cannot be excluded from taxable income and must be considered an addition to gross income & reported on the W-2. Does anyone have any opinions or experience to offer? The part-timer probably pays no income tax, so inclusion in their income will only affect the 8% SocSec and Medicare withholding (plus the organization has to match it). But it would be nice if it could be treated as a non-taxable fringe benefit in some manner.

[buzzardbreath]

Jumping thru Hoops with section 125

But it would be nice if it could be treated as a non-taxable fringe benefit in some manner.

Actually, there may be a way. I will use a numerical example. Assume the organization wants to incur $3000 on behalf of this employee to help with the situation.

1) Give the employee a $3000 raise in pay.
2) Deduct $250 per month from her paycheck.

Assuming this meets the criteria for Section 125:

1) The $3000 is NOT taxable for income tax purposes.
2) The $3000 is not taxable for SS or medicare purposes.

Her W-2 shows $3000 less than her gross pay for Taxable Income. Also shows $3000 less for SS Income and Medicare Income. In box 12 under the new rules, I believe $3000 appears as a code DD.

[ATSMAN]

If you establish a Sec 125 plan you will also have to include the other employee, otherwise the plan will fail discrimination testing and be disqualified.

[buzzardbreath]

Why not include both employees?

You are quite correct about non-discrimination, but so many qualifiers can be placed that quite a bit of discrimination can be navigated around.

For example: establish a s. 125 which provides coverage and payroll deduction for all full-time employees, and another coverage level and payroll deduction for all part-time employees. As long as you write it up this way, and observe it, and you have only one full-time and one part-time employee, you can do pretty much what you want.

[ATSMAN]

They have to be very careful and diligent because if they draft the Sec 125 plan with a narrow language to exclude this partime employee and in practice they fail to stick to those rules it would mean plan disqualification and retroactive taxation.

Run into these type of issues with 401(k) and other type of employer sponsored retirement plans.

How much confidence do you have that the client will not step out of bounds. I always avoid making those suggestions knowing full well that the moment they get it trouble guess who they point the finger to??

[buzzardbreath]

They Must Adhere

I wouldn't have any misgivings about the employer adhering to the narrow language. They are likely NOT to change anything as long as they have only these two employees.

If one were to take a cross-section of medium-and-large sized employers, broad discrimination would be found in favor of higher-paid employees. IRS lets them get by with defining "classes" and "sites" and "contracts" whereby carefully written qualifiers allows them to offer coverages which are unbalanced without technically being discriminatory within the various classes. You can start with the business model for WalMart and go from there...