United States: Employers Need 2015 Year-End Planning To Meet Employee Reporting And Withholding Requirements

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

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.