4.1. ERMUSR 05-12-2009 - Laserfiche WebLink

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employer includes $170 in boxes 1, 3, and 5 of Tom's Form W-2. The employer also enters $170 in box 12 with code "C." Coverage for dependents. Group-term life insurance coverage paid by the employer for the spouse or depen- dents of an employee may be excludable from income as a de minimis fringe benefit if the face amount is not more than $2,000. The part of this coverage that the employee paid on an after-tax basis is also excludable from income. For this purpose, the cost is figured using the monthly cost table above. Former employees. For group-term life insurance over $50,000 provided to former employees (including retirees), the former employees must pay the employee's share of social security and Medicare taxes with their federal in- come tax returns. You are not required to collect those taxes. Use the table above to determine the amount of social security and Medicare taxes owed by the former employee for coverage provided after separation from service. Report those uncollected amounts separately in box 12 on Form W-2 using codes "M" and "N." See the Instructions for Forms W-2 and W-3. Exception for key employees. Generally, if your group-term life insurance plan favors key employees as to participation or benefits, you must include the entire cost of the insurance in your key employees' wages. (This excep- tion generally does not apply to church plans.) When figuring social security and Medicare taxes, you must also include the entire cost in the employees' wages. Include the cost in boxes 1, 3, and 5 of Form W-2. However, you do not have to withhold federal income tax or pay FUTA tax on the cost of any group-term life insurance you provide to an employee. For this purpose, the cost of the insurance is the greater of the following amounts. • The premiums you pay for the employee's insur- ance. See Regulations section 1.79-4T (Q-6} for more information. • The cost you figure using the Table 2-2. For this exclusion, a key employee during 2008 is an employee or former employee who is one of the following individuals. See section 416(i) of the Internal Revenue Code for more information. 1. An officer having annual pay of more than $150,000 2. An individual who for 2008 was either of the fallow- ing. a. A 5°~o owner of your business. b. A 1 °~o owner of your business whose annual pay was more than ~ $150,000. A former employee who was a key employee upon retirement or separation from service is also a key em- ployee. Your plan does not flavor key employees as to partici- pation if at least one of the following is true. • It benefits at least 70% of your employees. • At least 85°ro of the participating employees are not key employees. • It benefits employees who qualify under a set of rules you set up that do not favor key employees. Your plan meets this participation test if it is part of a cafeteria plan {discussed in section 1 } and it meets the participation test for those plans. When applying this test, do not consider employees who: • Have not completed 3 years of service • Are part-time or seasonal, • Are nonresident aliens who receive no U.S. source earned income from you; or • Are not included in the plan but are in a unit of employees covered by a collective bargaining agree- ment, if the benefits provided under the plan were the subject of good-faith bargaining between you and employee representatives. Your plan does not favor key employees as to benefits if all benefits available to participating key employees are also available to all other participating employees. Your plan does not favor key employees just because the amount of insurance you provide to your employees is uniformly related to their pay. S corporation shareholders. Because you cannot treat a 2% shareholder of an S corporation as an employee for this exclusion, you must include the cost of all group-term life insurance coverage you provide the 2% shareholder in his or her wages. When figuring social security and Medicare taxes, you must also include the cost of this coverage in the 2% shareholder's wages. Include the cost in boxes 1, 3, and 5 of Form W-2. How- ever, you do not have to withhold federal income tax or pay federal unemployment tax on the cost of any group-term life insurance coverage you provide to the 2% shareholder. Health Savings Accounts A Health Savings Account (HSA) is an account owned by a qualified individual who is generally your employee or former employee. Any contributions that you make to an HSA become the employee's property and cannot be with- drawn by you. Contributions to the account are used to pay current or future medical expenses of the account owner, his or her spouse, and any qualified dependent. The medi- cal expenses must not be reimbursable by insurance or other sources and their payment from HSA funds (distribu- tion) will not give rise to a medical expense deduction on the individual's federal income tax return. For more infor- mation about HSAs, visit the Department of Treasury's website at www.treas.gov/offices/public-affairs/hsa. Eligibility. A qualified individual must be covered by a High Deductible Health Plan {HDHP) and not be covered by other health insurance except for permitted insurance listed under section 223(c)(3) or insurance for accidents, disability, dental care, vision care, or long-term care. For calendar year 2008, a qualifying HDHP must have a de- ductible of at least $1,100 for self-only coverage or $2,200 for family coverage and must limit annual out-of-pocket expenses of the beneficiary to $5,600 for self-only cover- age and $11,200 for family coverage. Page 12 Publication 15-B (2008)