IRS Denies Tax-Favored Status to Certain “Self-Funding” Health Plans

By James Pieper

The Internal Revenue Service (“IRS”) has issued a memorandum (“Memorandum”) indicating that it will deny tax-favored status to payments received under certain health plans marketed by their promoters as “self-funding.”

The Memorandum indicates that payments made under such plans will be considered “income” on the part of the employee (and thus not excluded from “gross income” for purposes of the income tax), and will be considered “wages” for purposes of the Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) taxes paid by the employer.

The Memorandum cites plans being offered by promoters as “fixed indemnity health plans” with associated “wellness plans.”  The benefit promoted is that the plans are “self-funding” because the purported tax benefits will offset the expense, and employees can gain apparently tax-favored payments as a result of the plan while reducing the FICA purportedly owed by the employer.

The key to the plans is that the employee receives a monthly payment, not as income, but as a “health benefit” in return for a simple but voluntary act such as calling a toll-free number to obtain health advice or participating in biometric screening.  So long as the employee undertakes one act per month, then the benefit is paid.  Promoters of such plans contend that the employee receives comparable take-home pay and the employer receives tax benefits, all on a self-funded basis.

The IRS, however, concludes in the Memorandum that the plans do not constitute “insurance” because the “health benefit” is almost certain to be paid, and, on an actuarial basis, the amount of “benefits” is almost certain to exceed the amount paid as “premium.”

Accordingly, the IRS concluded that payments related to the so-called “self-funding” plans will be considered “income” and “wages” – and, therefore, the apparent “self-funding” mechanism obtained via tax-favored treatment is illusory.

Any employers considering any sort of “self-funding” plan should consider the Memorandum as strong evidence that such a plan is not likely to produce the tax benefits promised.

© 2017 Vandenack Weaver LLC
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Guidance Issued on Option for Small Business to Apply Research Tax Credit to Payroll Taxes

The Internal Revenue Service recently issued guidance related to options for qualified small businesses claiming the research tax credit. Prior to 2016, the research tax credit could only be used against income tax liability. The Protecting Americans From Tax Hikes (PATH) Act provided that qualified small businesses may elect to apply the tax credit against payroll tax liability.

Qualified businesses have less than $5,000,000 in gross receipts and did not have gross receipts prior to 2012. Such a qualified business can apply up to $250,000 of the research tax credit against the payroll tax liability.

The election is made on Form 6765, which is included with the businesses income tax return, and Form 8974, which is included with the business payroll tax return. For 2016, if a qualified business has already filed its tax return and failed to timely make the election, an amended return may be filed making the election. Such amended return must be filed before December 31, 2017.

For additional information, see Internal Revenue Service, Notice 2017-23, available at https://www.irs.gov/pub/irs-drop/n-17-23.pdf.

© 2017 Vandenack Weaver LLC
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Preparing for January 31st Deadline to File W-2s

Effective for wages paid in 2016, recent federal law requires employers to file W-2s with the Social Security Administration by January 31,^, 2017.  Employers are familiar with the January 31^st deadline for providing copies of the W-2s to employees; however, previously, employers had until the end of March for electronic filings with the Social Security Administration. The earlier filing deadline is part of the increased focus on detecting and preventing refund fraud.

A 30-day extension is still available; however, the extension is not automatic and is generally only granted under extraordinary circumstances, such as a natural disaster. Applications for extensions are submitted on Form 8809.

Employers must be aware of the filing deadline to avoid penalties, which are determined as follows:

• $50 per Form W-2 if you correctly file within 30 days of the due date;
• $100 per Form W-2 if you correctly file more than 30 days after the due date but by August 1; or
• $260 per Form W-2 if you file after August 1, do not file corrections, or do not file required Forms W-2.

© 2016 Vandenack Weaver LLC
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New Nebraska Tax Credit for Volunteer Emergency Responders

In an effort to aid in the recruiting and retention of volunteer emergency responders, volunteer firefighters, and volunteer rescue squad members, Nebraska passed LB 886, known as the Volunteer Emergency Responders Incentive Act. By enacting this law, volunteer first responders are potentially eligible for a $250 refundable tax credit.

To qualify for the tax credit, the volunteer must be an active rescue squad member, active volunteer firefighter, or active emergency responder. To meet the activity requirements, the law uses the point system currently in place, requiring the volunteer to acquire 50 points out of a potential 100 in the given year. These points are awarded based upon the volunteer responding to emergency calls, participating in training, and other similar activities.

The point system will be maintained by each volunteer department, which will annually certify a list of volunteers meeting the points threshold to the Nebraska Department of Revenue. Starting with the second year that a volunteer is certified on the list, the volunteer can claim the $250 refundable tax credit.

© 2016 Vandenack Williams LLC
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IRS Announces There Will Be No Refunds of Taxes on Severance Payments

After the United States Supreme Court decision in United States v. Quality Stores, Inc., the Internal Revenue Service (IRS) has responded in kind with Announcement 2015-8. The issue in both the Supreme Court decision and the IRS announcement pertain to refunds of taxes on severance payments.

The United States Supreme Court in Quality Stores determined that severance payments to employees were taxable wages, subject to Federal Insurance Contributions Act tax (FICA). Other cases have found that severance payments were subject to other taxes, such as the Federal Unemployment Tax Act (FUTA) and Railroad Retirement Tax Act (RUTA).

The IRS announcement made clear that no refunds will be issued for taxes paid on severance payments. However, the only exception is a FICA tax exemption for severance payments in conjunction with state unemployment benefits, as per Revenue Ruling 90-72. A claimant may still appeal for a refund of FICA taxes if it is on an “additional or different basis,” such as taxes on certain fringe benefits. However, generally, severance payments are taxable and the IRS will not issue refunds thereupon.

 Further information may be found in the IRS announcement, found here: http://www.irs.gov/pub/irs-drop/a-15-08.pdf

© 2015 Houghton Vandenack Williams

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What Is the Difference Between an Employee and an Independent Contractor?

A Business FAQ with Mark A. Williams.

An employee is somebody that you pay wages to, you withhold taxes from them, and you provide them benefits. An independent contractor is one where you pay them a set amount of money and they have to withhold their own wages.

In a business, it is important to be able to recognize when can I pay someone as an employee versus when can I pay them as an independent contractor. There are a lot of different tests depending on certain questions:

• Do I have to provide workers comp?
• Do I have to pay unemployment?
• Do I have to withhold taxes from them?

Generally, I say to people that if you control what they do and tell them you have to be in my office and use my computer, you have to be here at 8 o’clock, you have to leave at noon, that sounds like an employee. And generally if you say to them, “Go get this done sometime over the next couple of weeks,” that sounds like an independent contractor. But really, you have to look at the facts and circumstances to make that determination every time.

© 2014 Parsonage Vandenack Williams LLC

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If My Business Is Located in One State and I Have Employees in Another State, What Are the Employment Tax Issues

A Tax FAQ with Mary E. Vandenack.

When you have employees in another state, you have to determine whether you have to pay and withhold income taxes on your employees in the other state. Many of the states have gotten very aggressive about charging for payroll taxes and claiming that if you have an employee in the state for even one day, that that employee is subject to employment taxes in that state. So it’s really important to get to know those rules so you can stay in compliance. Some states also have some specialized employment tax rules if you are sending an employee into another state for even a day. You are going to want to take a look at those rules.

© 2014 Parsonage Vandenack Williams LLC

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What Is Nexus?

A Tax FAQ with Mary E. Vandenack.

Nexus is simply the connection, usually considered in the business context, to another state. So what that is looked at for is that a business might be formed and do its primary operations in the state of Delaware, but it also engages in business in Colorado or sends employees into Colorado. We begin to look at what is called nexus to say how much connection that business has with the state of Colorado for purposes of being subject to Colorado laws and Colorado taxes.

Another nexus issue in the employment tax arena is when you send employees into another state, you look at their connection to that state to determine whether they are subject to that state’s payroll tax laws.

© 2014 Parsonage Vandenack Williams LLC

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IRS Requires Power of Attorney for Business Employees to Communicate

By Mary E. Vandenack.

Circular 230 provides details as to dealing with the Internal Revenue Service (IRS) on all matters. One of the issues addressed is who may communicate and correspond with the IRS. If a corporate employee is simply providing and receiving information, then a Form 4764 is sufficient to authorize the employee to communicate with the IRS. If a corporation wants to allow a specific employee to negotiate, advocate, or dispute issues with the IRS, a Form  2848 designating that employee must be filed.

© 2014 Parsonage Vandenack Williams LLC

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Supreme Court Decides Severance Payments Are Subject to FICA Tax

The U.S. Supreme Court has reversed a Sixth Circuit Court of Appeals decision by finding that severance payments unrelated to state unemployment insurance that are made to terminated employees are subject to tax under the Federal Insurance Contributions Act (FICA).

 The underlying case involved an employer, Quality Stores, Inc., that entered bankruptcy proceedings in 2001. Prior to and following the bankruptcy petition being filed, the employer made payments to terminated employees pursuant to two employee severance plans. When payments were made, the employer withheld federal income tax and the employee portion of the FICA tax and also paid the employer portion of the FICA tax on the payments. In 2002, the employer filed a claim for refund for the employer and employee FICA taxes paid on the severance payments. The IRS failed to either approve or deny the refund request, so the employer filed an adversary action in the bankruptcy proceeding. The bankruptcy court, district court and Sixth Circuit Court of Appeals all found that the severance payments were not subject to FICA.

The Supreme Court reversed the rulings of the lower courts based on FICA’s broad definition of “wages” which was found to include the severance payments. Following the Supreme Court decision, unemployment benefits other than those provided through state unemployment insurance are now “wages” subject to FICA tax. The Court noted that the IRS has taken the position that state unemployment benefits are not subject to FICA, but the Court reserved its opinion on whether that position is supported by FICA’s broad definition of “wages”.

© 2014 Parsonage Vandenack Williams LLC

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